Insights

With the end of the 2016/17 tax year looming, it’s time to review what steps you could be taking between now and April 2017, to reduce the amount of income tax you have to pay in January 2018. Here are our top 10 tips:

1. Consider the balance of income between husband and wife

Each individual has the following available to them for the 2017/18 tax year:

• A personal allowance of £11,000 (assuming their income is below £100,000);
• A 20% basic rate band of £32,000
• A 40% rate band on income up to £100,000;
• A dividend allowance of £5,000; and
• A savings allowance of £1,000 (for basic rate taxpayers) and £500 (for higher rate taxpayers).

If you are married or in a civil partnership, is your family income allocated between you both in the most tax efficient way? If not, consider whether there is anything that can be done about this to reduce your overall tax liabilities, for example altering rental property ownership, changing investment ownership.

2. Sacrifice some salary for tax free benefits

Salary sacrifice schemes are still a viable tax planning option and entitle you to switch to tax free alternatives instead of taking a cash bonus or salary. As with income transfers, salary sacrifice can be an effective way to reduce taxable income below £100,000 or £150,000, and therefore reduce your effective rate of tax. The rules concerning salary sacrifice have recently changed, find out more about what salary sacrifice benefits are still allowed in our earlier blog.

3. Review the amount of dividends you take from your company

Many close company director shareholders take a small salary and larger dividends. Following recent changes in the legislation which have involved a new £5,000 dividend allowance and the removal of the notional 10% tax credit, the rate at which dividends are taxed has changed.

Our earlier blog explains how the new dividend allowance and tax rates will be applied and what rates of tax you can expect depending on income levels.

In order to avoid higher rates of tax you could consider extracting value from your company in other ways, such as restricted dividends and higher salary, pension contributions, interest on loans made to the company or a level of capital repayments on loans in order to keep taxable income within certain tax rate bands.

4. Make tax efficient investments

Consider SEIS or EIS investments to reduce your income tax liabilities. If investments are made before 6 April 2017 they can be used to reduce your 2016/17 liability or can be carried back one year to reduce your 2015/16 liability.

If you have substantial investments outside an ISA or other tax-efficient wrapper, you could consider restructuring them to ensure the returns you get are either tax free, or are restructured as capital returns to fall within the maximum capital gains tax rate of 20% (or 28% for residential property investments) rather than the income tax rate of up to 45%.

5. Release equity from a buy-to-let property

If you have a rental property that is worth more than the mortgage remaining on it, it may be possible to reduce the tax payable on rental profits by releasing equity. Income tax relief is due on the loan interest, however the level of tax relief available is being restricted in tapered amounts from April 2017. Depending on your circumstances this may still be a beneficial approach. We have blogged about the changes to mortgage interest tax relief in the past.

6. Incorporate let properties into a company

As a result of the new restrictions to loan interest tax relief, some investors are making the decision to convert privately owned residential property investments into a limited company structure. In this way, the limited company takes over the running of a property letting business and loan interest becomes a tax deductible expense provided it does not exceed £2m a year.

This can be a useful strategy but requires careful evaluation because of the multiple tax implications involved and additional administrative responsibilities. For example, if you own a property and transfer it to a company, you may incur capital gains tax on the transfer. The additional rate of stamp duty should also be taken into account. There are other benefits to a limited company structure however that may offset these extra taxes. For example, the company will only pay tax at 19% (from 1 April 2017) on rental profits, and retained profits can be reinvested by the company without a further tax charge. Conversely, profits from a privately owned rental property will attract income tax at the marginal rate. Our previous blog has looked in detail into the question of whether to own a property through a company or personally.

7. Let a room in your home tax free

The amount of tax relief you can receive from renting a room in your house increased significantly from 6 April 2016 and is now £7,500 a year. It means that you can be receiving up to this value in rental payments without incurring any tax. Any additional income above this amount is taxed at your normal income tax rates.

8. Claim a grace period for furnished holiday lets

One of the most tax efficient ways to own residential property is as a furnished holiday let. However, there are strict rules to comply with in order to qualify and the property must be available for letting as holiday accommodation for 210 days and must be actually let for 105 days.

If you have previously met these letting and availability criteria but were unable to do so in the current tax year, you may be able to request a grace period and continue to benefit from the relevant tax breaks. This must be obtained through a formal election process via HMRC.

9. Opt for a low emission company car

Driving a lower emissions car can make a significant difference to the tax you will pay on a company vehicle. Alternatively, it may be worth using your own car for business travel and claiming a tax-free mileage allowance from your employer.

If fuel has been provided for private use, consider whether full reimbursement of the cost of that fuel to the company would be a cheaper option than paying the fuel scale charge, which is based on the car’s CO2 emissions.

10. Non UK-domiciled individuals - remittances

If you are non-UK domiciled and have brought money into the UK from overseas, it is essential to review the amounts remitted for the 2016/17 tax year well in advance. The tax rules for non-UK domiciled individuals are changing from 6 April 2017 and some people will incur additional taxes as a result. It may be worthwhile reviewing long term tax planning options before 6 April 2017 and also to check your likely tax liabilities for 2016/17, to be well prepared for these changes.

The rules allowing non-UK domiciled individuals to remit funds to be invested in unlisted qualifying companies, without incurring a tax liability remain in place. New restrictions regarding investments in property related companies have been introduced and it is therefore best to take specialist advice if you are non-UK domiciled and considering tax efficient ways to invest in trading companies.

For more tax planning advice please contact Lesley Stalker by emailing las@rjp.co.uk.