by Nick Robinson | Feb 19, 2016 | Accounting, Business Tax, Personal Tax
On 5th April you’ll need to pay. Pay your tax bill, that is. And although you’ve planned for it, saved for it, made sure you remember that it’s got to happen, sometimes it can still be a bit of a surprise – not to mention a shock when those figures come rolling in. The good news is that there are some great, easy ways to reduce your tax bill before the deadline, ensuring that you only pay what you really have to. The even better news is that these reduction methods are a) perfectly legal and b) will actually help you for the coming year(s).
ISA (Individual Savings Accounts) are an excellent way to put money aside and get a great return on it. You’ll have an annual allowance of £15,240, which means that you can put that much money into an ISA completely tax free; there is no capital gains tax or income tax to pay on money in an ISA. There are loads of different types of ISAs out there – some invest in property, some in stocks or shares, some are cash ISAs – so it’s worth spending some time researching which one will work for you. And to make the most of your allowance (and reduce that tax bill) you’ll want to make sure you open one before the deadline of 5th April 2016.
The Enterprise Investment Scheme
The EIS offers tax relief to investors when they purchase shares in small companies – companies that are potentially higher risk. The EIS is a sweetener, if you like, that entices those with the money to back businesses that might otherwise not find investment (or at least not find investment as a suitable rate). If you’ve got some money to spare – in other words, money that would otherwise be taxed – you could consider paying into the EIS instead. When you do so, you can claim 30% tax relief, which can be a big difference in your final bill – that’s £3,000 on a £10,000 investment.
The Seed Enterprise Investment Scheme
Much like the EIS, the SEIS is there to help start up companies. It’s higher risk, of course, but the tax relief is 50% on this one, so it could well be worth thinking about.
You obviously pay yourself out of your company, and that’s the point of it. In the coming tax year, there is a tax free dividend allowance of £5,000 (anything more than that is taxed at 7.5%). If you don’t want to pay any tax at all, you can enjoy a basic salary of £8,112 plus £7,888 in dividends, although that might not put much food on the table. So if you want more than £16,000 in the coming year you need to look at the breakdown of salary compared to dividends, and pay yourself in the right proportions to limit the tax implications.
Having a pension is a good idea – and in a small business it’s a necessity. But did you know that paying pension contributions can save you money when it comes to your tax bill? Well it can. It reduces the tax owed because it reduces the profit made, it’s that simple. If you had a £10,000 profit, and you put £2,000 of that into a pension fund, you’ve suddenly for an £8,000 profit. And instead of paying £2,000 in taxes, you’ll be paying £1,600. So you’ve boosted your pension pot and reduced your tax bill at the same time. Of course, the more you can put into your pension, the more you’ll get out at the end and the less tax you’ll pay in the here and now – it’s a win win.
Capital Gains Allowance
Currently, everyone working in the UK has a capital gains tax allowance of £11,100. It’s not carried forward, so if you don’t take advantage of it, it’s gone forever. You can even transfer investments to your spouse or civil partner since this isn’t seen as a sale and can mean that you spread your money over two sets of CGT allowance instead of using all of one, none of the other, and paying a ton of tax when you might not have to. It can get complicated though, so it’s best to ask for advice.