Use it or lose it - Maximise your tax allowances

ISA

ISAs are very tax efficient and, therefore, high up the list of investments that make sense. You can invest up to £20k per adult in this tax year. Any interest or dividends paid out are tax-free, along with any potential gain when selling shares within the ISA wrapper. There is no upper cap on what you can build up within an ISA. There are already ISA millionaires out in the wild.

You can’t carry this allowance forward or back, so definitely use it or lose it and remember it is a personal scheme, not a business one, so it needs to come out of personal money that has been taxed elsewhere.

Pensions

An individual or a business on behalf of one can contribute up to £40k per year into a pension scheme. It’s not for me to get into the potential returns on the investment, but the tax advantages of the contributions are pretty good.

If the contributions come from the business, then your company will benefit from full Corporation Tax saving on the contributions as well as meaning you don’t have to draw the money from your business personally and take the tax hit on the drawings.

You can also go back an additional three years to use unclaimed contributions allowance (technically, it can be carried forward three years, but that’s hard to get your head around). So, if you and your spouse have not made any contributions for three years, you could put a whopping £320k in between you and claim CT relief on the lot!

Be careful to make the payments so the money hits the pensions scheme before the 5th of April; this is not a tax relief you can accrue for and make the actual payments later.

Remember, the income you receive when you start to draw down on a pension is taxable. A lifetime allowance means you can currently max out your pot at £1,073,100 without incurring additional tax charges.

Combining with the changing Corporation Tax rate

Just last week, we had a business owner and his wife looking to max out their unused pension contributions. They could go back an additional three years each, meaning the total contribution came to £320k. With a tax saving of Corporation Tax at 19%, that came to £60k tax saving - not too shabby already!

But one of my team had a better idea, which led to an extra £19k in tax savings! This client’s business had a company year end of March. The main Corporation Tax rates are due to rise from 19% to 25% from the 1st of April for profits over £250k (Marginal Rate Relief between £50k-250k profits).

By planning for the payment to leave the business and hit the pension scheme between the 1st-5th April, it means the client won’t lose their £80k contribution allowance but will receive full corporation tax relief at 25% rather than 19% bringing total tax savings of CT to £80k - boooom!

He just needed a call to his bank manager to facilitate moving £320k around with exact precision on timings.

If the above scenario sounds like a good idea, but your company year-end is not March, then you can amend it to March to make the above work for you - it would certainly be worth it for an extra £20k relief.

Capital Gains Tax (CGT)

Capital Gains come with their own annual tax-free allowance, currently £12,300 (but reducing to £6k next year).

If you haven’t used this allowance and have gains that you have not yet crystallised, then perhaps consider selling this asset before the 5th of April to lock in the gain and use up that allowance - particularly with the changes next year.

On the flip side, if you have already used the allowance with some nice gains, think about any loss-making assets (crypto/NFT, I am looking at you!) you currently have. Is it worth disposing of them before the 5th of April to offset your gains and bring that tax down.

Remember, changing the timing of good decisions to minimise your tax is smart. Selling an asset that is performing well just to get some tax relief might not be so bright…

Inheritance Tax (IHT)

Be generous. You have an annual gift exemption every year, meaning you can give away up to £3k without it forming part of your estate for inheritance tax purposes.

It doesn’t matter who that money is given to or how it is split.

You can also gift up to £250 per person in the tax year to as many people as you like, as long as that person hasn’t benefited from another allowance, i.e. the £3k gift allowance above.

You could also give generous wedding gifts tax-free:

• £5,000 to a child

• £2,500 to a grandchild or great-grandchild

• £1,000 to any other person

Other Tax-Efficient Investments

Under this general heading fall Venture Capital trusts (VCT), Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS).

These are investments in early-stage start-ups and are usually super risky. The flip side is they come with a shed load of tax relief. If you have maxed out your other allowances, have money to spare, and like a risk, consider these options.

You can invest £200k in a VCT, £100k in SEIS and £1m in EIS (£2m if knowledge-intensive-companies).

The relief can be complex, so I won’t go into detail here, but I will cover this another week.

Keep a close eye on those Tax Brackets

A cornerstone in the tax planning tool kit is to be aware of various tax brackets/points and keep below them where you can, and it makes sense to do so. Also, think about your personal earnings this year compared to the next. If next year will be much lower, then consider delaying some of this year’s earnings.

Dividends vs Directors Loans

As a small business owner, you have control over how you treat your drawings from the business (subject to the various rules around what constitutes a dividend).

Review your dividends for the current year and use this alongside the tax points below to determine whether it makes sense to draw more before or after the 5th of April. If you need the money out before the 5th of April but want to avoid crossing a tax bracket, consider taking a director’s loan and repaying it with cash or a dividend on the 6th of April.

Be wary of directors’ loans exceeding £10k (BIK on the interest element), repaying the loan within nine months of your company year and the bed & breakfasting rules - a good topic for another day.

If you haven’t declared any dividends yet, make sure you use up your dividend allowance of £2k this year, reducing to £1k next.

Tax Points

• £12,570 - Tax-Free Personal Allowance

• £50,000 - Start to pay High Income Child Benefit Tax

• £50,270 - Enter the Higher Rate Tax bracket

• £60,000 - Lose all of your child benefits via the tax charge

• £100,000 - Start to lose the personal allowance

• £125,140 - Lose all of your personal allowance

• £150,000 - Start to pay additional rate tax. (£125,140 from April)

Get a plan together

Following the above and considering what might work for you is a good start. Another good step in the right direction is to take the free SAVE tax scorecard I created. A few minutes of your time will give you a custom report on which areas you need to address to save the most tax.

https://savetax-crisp.scoreapp.com/

As I mentioned at the start though, none of this is a replacement for tailored specialist advice from an expert, so tread carefully - DIY is always risky in the tax world!