As we head toward the end of the tax year, now is a great time to review your affairs and ensure you are in the best place - many businesses will also have March year ends so there is plenty to consider.
An important relief is the tax relief given on pension contributions. There is a limit to the contributions which can be paid in each tax year which is called the annual allowance. This allowance is set at £40,000 per tax year but can be increased if your pension contributions in the previous three years were less than the annual allowance. There are certain circumstances where you might have a lower annual allowance. This is where you have a high income, or you have previously accessed your pension pot. It is important to understand if these apply, as there may be a pension savings tax charge if your contributions exceed the annual allowance.
For those who are directors of their own companies, the pension contributions might be made by the company rather than the individual. In these circumstances, it is important the contributions are paid before the end of the accounting year to benefit from the tax relief.
Business owners should consider the timing of asset purchases to maximise the relief available. Until 31 December 2021, businesses could claim Annual Investment Allowances (AIA) on spending of up to £1,000,000 per year on plant and machinery purchased. This allows for 100% of this cost to be deduced from profits rather than the normal 18%. The £1,000,000 AIA amount has been temporarily extended until 31 March 2023 to encourage businesses to continue investing in plant and machinery.
There is also the temporary super deduction for plant and machinery purchased between 1 April 2021 and 31 March 2023. This means that for qualifying purchases, 130% of the cost can be claimed as capital allowance.
Please remember that plant and machinery doesn’t include the purchase of cars but does include commercial vehicles. Cars are subject to their own lower rates of tax claim, but the good news is that for electric cars which are purchased new and unused, 100% of the cost can be claimed against profit using the First-year allowance. This together with the low benefit in kind tax charge for directors and employees, make purchasing an electric car tax efficient.
For taxpayers with investments, including rental property, now is a good time to look at their Capital Gains Tax (CGT) position. Each taxpayer gets a CGT annual exemption of £12,300 per tax year. This means that if the taxable gains in the year are less than £12,300, there will be no CGT to pay. This might be an opportunity to realise capital gains before 5 April without paying CGT. Care must be taken if the gain relates to residential property as there are separate rules for reporting gains to HM Revenue and Customs within 60 days.
Where it is possible, directors/shareholders may also want to review their level of salary and dividends before the end of the tax year. With the rate of dividend tax increasing by 1.25% in the new tax year, now is a good time to understand the mix of salary and dividends to make the most effective use of the rates and available allowances.
Finally, there are also tax-free allowances given for interest from savings of £1,000 per tax year for basic rate taxpayers and £500 per tax year for higher rate taxpayers.
However simple or complex your tax affairs, a review now will help you make use of the available allowances and reliefs before the end of the tax year.
If you need assistance getting your tax affairs in order, get in touch with our team to find out how we can help.