Lovewell Blake’s top tips on year-end tax planning

As we approach the end of another tax year, it seems a good time to ensure your finances and tax position are structured as efficiently as possible. Lovewell Blake have created a handy tax planning guide filled with advice on how to ensure your finances are in order.

Please note that throughout this article, the term spouse includes a registered civil partner. Lovewell Blake have used the rates and allowances for 2018/19.

Using dividends
Dividend payment has traditionally been part of the profit extraction strategy for director-shareholders. Most family companies will pay directors a minimal salary – preserving state pension entitlement, but below the threshold at which National Insurance contributions (NICs) are due – with the balance extracted as dividends. The saving in NICs here can be considerable.

Dividends have their own tax treatment. In 2018/19, tax is paid on dividends at 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers. Taken in conjunction with the Dividend Allowance, £2,000 for 2018/19, this can be very favourable. However, company profits taken as dividends remain chargeable to corporation tax: 19% in 2018/19, falling to 17% from 1 April 2020.

Tax charge on the company
A tax charge on the company arises where the overdrawn balance at the end of the accounting period is still outstanding nine months later.

For loans made on or after 6 April 2016, this is an amount equal to 32.5% of the loan, but where the balance is repaid, there is no tax charge. This has given rise to the situation where loan balances are sometimes repaid in time to avoid a tax charge, but a further loan to the shareholder is then made almost immediately afterwards. HMRC is keen to ensure that the loan rules are not manipulated, and complex arrangements exist to enforce this. They do not apply however where there is a genuine repayment through the award of a valid bonus or dividend.

This is an area in which HMRC is taking an increasing interest. If you are concerned about whether the tax charge could apply to your company, Lovewell Blake would be happy to advise.

Using the personal allowance
Making use of the personal allowance (PA) for all family members is always prudent. It can be especially beneficial where an individual has no other taxable income and has perhaps routinely carried out work for the business on an informal basis in the past.

Salaries paid at a level realistically reflecting the duties carried out, and made for the purposes of the business, will also attract a corporation tax deduction. Care will be needed to set a salary at an optimal level with regard to National Insurance thresholds. National Minimum/Living Wage requirements and pensions auto-enrolment may also need consideration. Payment should be formally recorded, as should hours worked.

PA is reduced where total income is over £100,000, by £1 for every £2 of income above this limit. Careful thought should thus be given to deferring such income as you have discretion over – bonus payments and dividends potentially falling into this category. Holding such payments back until the new tax year may produce a more favourable outcome.

Planning for Child Benefit Charge
Where someone receives Child Benefit, it is important to remember that although dividends are taxed at 0% within the Dividend Allowance, they still count as income when it comes to High Income Child Benefit Charge. Taking dividend income could potentially trigger an unexpected charge here.

High Income Child Benefit Charge
If you receive Child Benefit, it is important to remember that taxpayers with adjusted net income in excess of £50,000 during the tax year are liable to High Income Benefit Charge. If both partners have income above this level, the charge applies to the partner with the higher income.

The charge is 1% of the full Child Benefit award for every £100 of income between £50,000 and £60,000. Where income is more than £60,000, effectively all Child Benefit is lost. You can elect not to receive Child Benefit if you or your partner prefer not to pay the charge.

When someone becomes liable to the charge, they are required to notify HMRC: it is not something that HMRC will automatically set in progress. Since the partner liable to the charge is not necessarily the partner in receipt of the Child Benefit, potential problems can arise. It is not uncommon for example, for partners to be unaware of the exact level of the other’s income and so unaware of their duty to notify. There can also be problems in a marriage break up, with ex-partners needing to share financial details.

Appropriate strategies to keep each parent’s income below £50,000 can be considered here. If two parents have an income of £50,000 for example, the household can receive full Child Benefit. But if one parent receives all the income, and the other none, all Child Benefit is lost.

In many family companies, director-shareholders have ‘loan’ advances from the company. These are often personal expenses paid by the company: but essentially a director’s loan is any money received from the company that is not salary, dividend, repayment of expenses, or money you have previously paid into or lent to the company. Such monies are accounted for via a ‘director’s loan account’ with the company. At the year-end, the tax position for both company and director depends on whether the loan account is overdrawn – so that someone owes the company money – or whether it is in credit.

Timing matters
The timing of dividend payments to shareholders is important, and again the question is whether to make payment before or after the end of the tax year. A dividend payment in excess of the Dividend Allowance, delayed until after the end of the tax year, may give the shareholder an extra year to pay any further tax due. The deferral of tax liabilities on the shareholder depends on a number of factors. Please contact Lovewell Blake for detailed advice.

Timing is important with directors’ bonuses, too. Should a bonus be timed before or after the end of the tax year? The date of payment will affect when tax is due, and possibly the rate at which it is payable.

Bonus or dividend
Careful judgment may be required when deciding whether a bonus payment or dividend is more tax efficient. Bonuses are liable to employee and employer NICs. For Scottish taxpayers, a further point to consider is that bonuses are now taxed at Scottish rates of income tax as employment income, but dividends are taxed at UK rates as savings income.

Residential landlords are continuing to feel the impact of new legislation.

Interest relief restrictions for individual landlords of residential property are still being phased in, reducing the deductibility of finance costs, such as mortgage interest, interest on loans to buy furnishings, or fees incurred taking out or repaying loans or mortgages. Only a proportion is now allowed. For the 2018/19 tax year, the proportion drops to 50%, with 50% given as a basic rate deduction. Further reductions are to come. The restrictions have significant impact on the way landlords are taxed, and may push basic rate taxpayers over the threshold at which they become higher rate taxpayers.

Budget 2018 also brought changes to the capital gains tax (CGT) regime which take effect from April 2020 and may impact someone renting out, and then disposing of, what used to be a main home. Historically, the final 18 months of ownership of a property has attracted a valuable CGT exemption. This will be reduced to nine months. Also from April 2020, CGT lettings relief is no longer available unless the owner shares occupancy with a tenant. We look at this further in ‘Tax when you sell your home’.

Residential landlords are continuing to feel the impact of new legislation.

Interest relief restrictions for individual landlords of residential property are still being phased in, reducing the deductibility of finance costs, such as mortgage interest, interest on loans to buy furnishings, or fees incurred taking out or repaying loans or mortgages. Only a proportion is now allowed. For the 2018/19 tax year, the proportion drops to 50%, with 50% given as a basic rate deduction. Further reductions are to come. The restrictions have a significant impact on the way landlords are taxed, and may push basic rate taxpayers over the threshold at which they become higher rate taxpayers.

Budget 2018 also brought changes to the capital gains tax (CGT) regime which take effect from April 2020 and may impact someone renting out, and then disposing of, what used to be a main home. Historically, the final 18 months of ownership of a property has attracted a valuable CGT exemption. This will be reduced to nine months. Also from April 2020, CGT lettings relief is no longer available unless the owner shares occupancy with a tenant. We look at this further in ‘Tax when you sell your home’.

There may be steps which can be taken to minimise your tax liability or optimise choices for the future. Lovewell Blake would be delighted to advise on appropriate action, so if you have any questions you can contact them here. 

Photo: Colin Fish

Photo credit: Lovewell Blake