It’s that time of year again. Many of us will have just paid our tax bill and be smarting from the size of it – not only what was due on what we earned in 2016/2017, but the amount we were required to pay on account, in anticipation of 2017/2018 earnings. And we get to do it again at the end of July. Oh, joy!
A big issue for some of us will be that the bill we were presented with was bigger than anticipated, due to tax changes that came in at the start of the last tax year, in April 2016. If you do your own accounts, or if your accountant isn’t on the ball, then you might well have been tripped up by this.
So, what changed?
Here’s a quick rundown of the main changes that might have impacted negatively on your tax bill.
First, a bit of good news – the tax-free personal allowance went up from £10,600 to £11,000 for the 2016/2017 tax year. On 6 April 2017, it rose again, to £11,500.
Also, the 40p tax threshold rose for the 2016/2017 tax year, from £42,385 to £43,000. This also rose again on 6 April 2017, to £45,000, and the government says it will be increased to £50,000 by 2020.
Landlords’ wear and tear allowance
Prior to April 2016, landlords could offset 10% of their rental income against maintenance – even if no maintenance was carried out. As of April 2016, they can only claim for actual maintenance that they can prove took place.
For anyone unaware of this and who didn’t keep receipts, that could be costly – and it comes on top of the increase in stamp duty! (Stamp duty was increased for landlords, and those buying second homes. As of 1 April 2016, a 3% surcharge was slapped onto the existing price bands; it might sound like small amount, but the impact can be very costly – as you’ll know, if you’ve been hit by it.)
There has been a reduction in the lifetime allowance, from £1.25 million prior to April 2016 to £1 million after.
If your pension pots are worth more than this figure, you pay tax at a rate dependent on how you receive the money. If you take it as a lump sum, the rate is 55%; if you take it any other way, the rate is 25%.
The annual allowance is also changing. That’s defined by The Pensions Advisory Service as: ‘a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes.’ This will be gradually reduced – from £40,000 to £10,000 – for people earning between £150,000 and £210,000 a year.
The dividend tax credit rules have been replaced by a set rate tax-free allowance. Now, the first £5,000 of income from dividends in the tax year are tax-free. Dividends above this level will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers, and 38.1% for additional-rate taxpayers.
Advance warning, people – in the 2017 Spring Budget, the chancellor announced that from April 2018, the tax-free dividend allowance will be cut to £2,000. At the current rates of tax, that means increases in liability of £225, £975, and £1,143, respectively.
Right, that’s the bad news over and done with. Now, what are we going to do about it?
Four ways to make the most of your tax allowances
We all need to pay our fair share of tax, we know that, but it’s not prudent to pay more than you should. That being the case, here are, first, three tax planning ideas that can potentially help you obtain a tax refund, or a reduction in future, then a sensible strategy to make sure you don’t waste an available tax allowance.
Invest in Enterprise Investment Scheme (EIS) companies
The Enterprise Investment Scheme (EIS) allows investors who put money into small, unquoted trading companies to benefit from tax relief.
They can also invest in Seed EIS companies – very small, early-stage start-up businesses – and as the risk of putting money into them is considered to be even higher, so is the available tax relief on investment.
If you invest in an EIS or Seed EIS qualifying business prior to 6 April 2018, it can be treated as having been made in 2017/2018.
The tax relief rate is 30% of the amount invested for EIS and 50% for Seed EIS. Say you put in £10,000; your tax liability for 2017/2018 will be reduced by £3,000 if it qualifies as an EIS company and £5,000 if it qualifies as a Seed EIS. There are also options to defer Capital Gains Tax.
If you consider doing this, it’s a good idea to seek specialist advice.
Boost your pension savings
If you put more money into your pension pot prior to 6 April 2018, you should be able to reduce future tax payments on account. Unfortunately, it won’t get you a refund this year, but it could cut your bill next year. You’ll need to bear in mind the maximum annual allowance, but you might be able to take advantage of any unused relief brought forward from the previous three tax years.
Again, seek specialist advice.
Invest in a furnished holiday letting (FHL)
We mentioned the changes to taxation for landlords earlier. There’s one type of property that some of the changes don’t apply to, and that’s furnished holiday lettings (FHL).
Investing in an FHL property offers potential tax breaks, including in the case of capital allowances on furniture and white goods, and Capital Gains Tax, in relation to entrepreneurs’ relief and for pension purposes.
While there are fairly strict conditions that must be met for a property to qualify as FHL, there are tangible benefits to be gained. As always, check it out thoroughly before committing.
Put your spouse on the payroll
Pretty much everyone in the UK is eligible for an annual tax-free personal income allowance – as of April 2017, that’s £11,500. If your spouse is employed elsewhere, they’ll be using their allowance, but if not, then it’s wasted income. So if your spouse doesn’t work, but does help out with the business, get them on the payroll. And if you’d otherwise have to employ someone to do the jobs that they do, don’t they deserve to be paid for their labours?
Make sure you check out all the implications, but do check it out. After all, an extra £11,500 coming into the household could only be a good thing!
Need a bit of advice?
Tax is complicated. Investments are complicated. Pensions are complicated. Life is complicated! We can’t help you with the last of those, but we can help you to make sure you don’t pay more tax than you need to – and to get a refund, if you’ve paid too much. If you want to talk things through, get in touch. We can help you see the wood for the trees, and to avoid overpaying – or underclaiming – when it comes to your tax liability.