Now that the 31 January deadline for the filing of 2014/15 Tax Returns has passed most of us who work in tax will turn to think about planning for the end of the 2015/16 tax year, on 5th April 2016. The implementation of some year end tax planning can help to minimise tax liabilities for the year and there are many areas which can be considered.
Most company owners will already be considering the effects of the new dividend tax rules which are coming into force on 6th April. The proposed change to the basis of taxing dividends from 2016/17 means that the tax rate on dividends that are not covered by the £5,000 tax-free amount will increase by 7.5% compared to the current year, where the business owner has a high level of personal income, tax will be charged at 38.1%. Business owners may therefore wish to consider the effects of maximising profit extraction from their company prior to the changes, even if the company has no cash funds to actually pay the dividends amounts could be left on loan to the company to be drawn at a later date. Paying a dividend before 6 April 2016 could be beneficial even if it remains within the same income tax band. If company owners are thinking of winding up their company, disincorporating or extracting assets from the company it may be advantageous to do this prior to 6th April.
Another subject to consider prior to 6th April is the benefit of making pension contributions which depending on income levels can attract tax relief at up to 60%. Pension contributions seem increasingly attractive following recent changes to drawdown rules allowing increased access to funds. For relief against 2015/16 income, these must be paid on or before 5 April 2016. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of UK relevant earnings, but also subject to the annual allowance of £40,000. Unused allowances from previous years may be carried forward in some circumstances. From 2016/17, the £40,000 allowance will be tapered down to a minimum of £10,000 if income exceeds £150,000. In preparation for this, transitional rules mean that actual annual allowances for 2015/16 could be as high as £80,000.
Pension funds are broadly free of UK tax on their capital gains and investment income. Most people aged 55 and over can draw their pension savings flexibly and up to a quarter of the fund is normally tax-free with withdrawals above this amount liable to income tax at an individual’s marginal rate. The maximum an individual can hold in a tax-favoured pension scheme is £1.25 million in 2015/16, reducing to £1 million in 2016/17 and appropriate investment advice should be taken before investing.
Other strategies to think about prior to the end of the tax year include making full use of the family tax-free personal allowances (£10,600 for 2015/16) and basic rate bands for the year. Consideration could also be given to making the most of other tax allowances including ISA allowances, Capital Gain Tax annual exemptions and Inheritance Tax annual exemptions.
This article is only a brief outline of strategies which could be pursued and there are many other options available to taxpayers. If you require further information please telephone Mairi Drummond on 01573 224391 or email firstname.lastname@example.org.
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