For business owners, every penny counts. That’s why it’s economical to use strategies that stretch your money that little bit further.
The end of the tax year is a great time to do this, as it could be your last chance to make the most of various allowances that can boost your wealth and mitigate your tax liabilities.
From pensions and investments to gifting and other Inheritance Tax considerations, there are plenty of ways you can shore up your finances for you, your family, and your business.
Here are five tax breaks you could make the most of before 5 April.
1. Maximise pension contributions
The pension Annual Allowance is the amount you can pay into your pension and that benefits from tax relief. For 2020/21, this is 100% of your annual earnings up to £40,000.
By using as much of your pension Annual Allowance as possible, you’ll benefit from the maximum amount of tax relief available, boosting your retirement pot.
What’s more, making a pension contribution from your company is an allowable business expense. This means you can reduce your Corporation Tax liability, effectively saving you 19% on pension contributions.
Bear in mind that there are two factors that could reduce your pension Annual Allowance:
- If you have a threshold income over £200,000, or an adjusted income over £240,000. If this is the case for you, the Tapered Annual Allowance could reduce your Annual Allowance by £1 for every £2 above these thresholds. The taper can reduce your Annual Allowance by a maximum of £36,000, meaning your Annual Allowance could be as little as £4,000.
- If you have flexibly accessed your pension in the tax year. This may make you subject to the Money Purchase Annual Allowance, reducing the amount you can tax-efficiently save to £4,000.
You can carry forward any unused pension Annual Allowance for up to three tax years. This could mean you’re able to make use of the allowances from 2017/18 onwards if you haven’t already.
2. Make the most of the ISA allowance
If you haven’t already used your annual ISA allowance, you could consider moving any cash savings or investments into an ISA. There are a few different ISA products available that you could make use of:
- A Cash ISA. Similar to a savings account, a Cash ISA is held in cash and any interest you make is tax free. Some Cash ISAs have rules and restrictions about how much you can withdraw, but also typically offer higher interest rates.
- A Stocks and Shares ISA. You can invest in the stock market and other assets in a Stocks and Shares ISA. Any profits your investments generate, including dividends, are free from Income Tax and Capital Gains Tax.
- A Lifetime ISA. If you’re aged 18-39, you could open a Lifetime ISA (LISA), an account specifically designed for first-time home buyers looking to get on the property ladder, or as an extra retirement pot. You can pay a maximum of £4,000 into a LISA in the 2020/21 tax year and you’ll receive a 25% government bonus on any contributions. However, be aware that there’s a 25% fee on any withdrawals outside of using it for first-time home buying or retirement.
The ISA allowance for 2020/21 is £20,000. You can use the whole allowance on one ISA, or spread it across different accounts. If you don’t use it, the ISA allowance does not roll over to the next tax year.
3. Use your Dividend Allowance
The Dividend Allowance is the amount you can make from dividends on your investments without paying tax. For 2020/21, the allowance is £2,000.
For business owners, the Dividend Allowance is particularly useful because you can pay yourself £2,000 tax free directly from your business.
If you do end up taking more than the tax-free Dividend Allowance, the tax is calculated based on your Income Tax band:
- Basic rate: 7.5%
- Higher rate: 32.5%
- Additional rate: 38.1%
4. Consider gifting to reduce your Inheritance Tax liability
As a business owner, it’s possible you could face a large Inheritance Tax (IHT) liability. That’s why it can be sensible to gift money to reduce the value of your estate.
To do this, you could make use of the annual exemption. In the 2020/21 tax year, every individual has an annual gifting exemption of £3,000. This means you can make a gift of up to £3,000 and it will immediately fall outside your estate for IHT purposes.
And, as the exemption is for individuals, a couple could gift up to £6,000 before 5 April.
As you can carry forward your annual exemption for one year, you may also be able to use the 2019/20 gifting allowance. This would allow you to individually gift £6,000, or up to £12,000 as a couple, if you haven’t used either year’s allowance so far.
5. Make the most of your family’s allowances
Once you’ve exhausted all your personal options for the end of the tax year, you could consider making the most of your spouse, partner, or children’s allowances.
Spouse or partner’s allowances
Making use of your spouse or partner’s allowances can be a good way to make the most of the reliefs and exemptions available. This can be especially prudent if they’re a director in the business.
Two options you could consider are:
- Ensuring your spouse or partner has already used the same allowances above. Everyone has an individual pension and ISA allowance, so you can effectively double the tax benefits by having your spouse or partner use them too.
- Making use of the Marriage Allowance if you’re able to. If you’re married or in a civil partnership, one of you pays basic-rate Income Tax, and the other has an income below the Personal Allowance (£12,500 in 2020/21), the Marriage Allowance lets the lower earner pass part of their Personal Allowance to the other. It effectively increases the higher earner’s Personal Allowance to £13,750 – a step that saves up to £250 in Income Tax.
If you have children, they also have their own allowances, giving you extra options for tax savings.
Two ways your children’s allowances could help you mitigate tax are:
- Contribute to a Junior ISA for your child, making use of the £9,000 Junior ISA limit (2020/21). For children, there are both Cash and Stocks and Shares Junior ISAs available. You can split the £9,000 limit between them as you wish. Just like an adult ISA, interest gained in a Cash ISA is tax free, and any profits made on investments in a Stocks and Shares ISA are exempt from Income Tax and Capital Gains Tax.
- Starting a pension for a child. Starting your child’s pension early could provide them with a bit of extra income in later life. In the 2020/21 tax year, you can pay up to £2,880 into a pension for a child. And, even though they aren’t working, they will also receive basic-rate tax relief, boosting your contribution to £3,600. Remember that the child won’t be able to withdraw these funds until retirement age.
Get in touch
If you’d like help making the most of your tax allowances and exemptions before 5 April, please contact us. We can provide personalised advice for you and your business.
Email firstname.lastname@example.org or call 0113 262 1242.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.