Tax planning tips for individuals

There are some great opportunities to minimise your tax bills, just read on to familiarise yourself with the basics.

Tax Relief on Pension Contributions

Making pension contributions is a great way to obtain tax relief.  You can make tax relievable pension contributions up to the higher of your earnings and £3,600.  There is a cap on this relief of £40,000, however any used allowance can be carried forward for up to three years.

For personal pensions, relief is given by increasing the basic rate limit and the higher rate limit by the gross contribution amount in your self-assessment tax return.

For example, if you earned £60,000 and made a net pension contribution of £7,200, you save £1,800 in tax!

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If you are a higher rate taxpayer receiving dividends, this saving can be even higher as you pay more at the 10% basic rate band, rather than at the higher one.

If you are an employee and make a contribution to an occupational scheme run by your employer the relief is automatic through their payroll scheme.

Deductible Interest

The interest paid on qualifying business related loans can be deducted from total income.  The effect is to reduce the amount of taxable income, thereby reducing the tax liability.

Tax Reducers

Have you got a high income tax or capital gains tax bill?  If you choose to invest in qualifying company shares under one the follow schemes, you can reduce your tax liability by the lower of:

  1. A % of the amount invested (the percentage depends on the investment scheme).
  2. Your tax liability for the year

These schemes are designed to promote enterprise and investment by helping high-risk, unlisted trading companies raise finance by unconnected persons.  Remember however that you are making an equity investment and your investment is subject to price fluctuations - in the worst case scenario the value of your investment could reduce to zero.

The available schemes comprise:

  • Venture capital trusts (VCTs) – 30%
  • Enterprise investment scheme (EIS) – 30%
  • Seed enterprise investment scheme (SEIS) – 50%

There are certain conditions for companies to qualify under each scheme and for investors to claim relief.  Please contact us if you would like to find out more about any of these schemes.

Property Investment Reliefs

Do you invest in property?   If you let a furnished property, you can claim a wear and tear allowance of 10% of rent.  Also, if you make a loss on your property business it can be carried forward to be set against future profits from the same business.

If you have a furnished holiday letting, it is treated as a trade.  This means that capital allowances are available on the furniture and the income is relevant income for pension purposes.  Capital gains tax rollover relief, entrepreneur’s relief and relief for gifts of business assets are also available.   However, any losses cannot be claimed against general income, only carry forward trade loss relief is available.

Heard of the rent a room relief scheme?  The first £4,250 of rent received from letting a room or rooms in a main residence is tax free.

Directors/Shareholder Earnings

When a director/shareholder takes their remuneration in the form of dividends as opposed to salary, national insurance contributions are not due.

Note that the benefit of this needs to be weighed up against the corporation tax implications for the company as salary and national insurance costs are tax deductible for companies, whereas dividends are not.  Also, the fact that dividend income is not earnings for pension purposes needs to be taken into consideration.

A combination of remuneration and dividends may give the best result.

Married Couples and Civil Partners

If one partner is a higher rate taxpayer and the other a lower rate taxpayer, it may be worth looking at the ratio of investments held by each partner in order to minimise tax.

Tax Efficient Investments

Individual savings accounts (ISAs) allow you to invest up to £15,000 each year in cash or equities.  Investments in these ‘wrappers’ are exempt from both income tax and capital gains tax.

Note that equities are high risk investments as neither the income nor the capital is secure.


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