Top ten tax tips for healthy 2016

As we draw a close on 2015 all eyes are on Budget 2016 and what is in store for us as business owners and individuals.

We are already aware of some changes happening in 2016. In addition, there are always steps you can take to ensure you maintain a healthy tax position.

To help you get started, we have produced our top tax tips ranging from advice on the new dividend taxation coming into force in April 2016 as well as tips on utilising a spouse’s tax allowance, research and development tax relief and details of the potential demise of pension tax relief.

Lee Watson, our senior tax manager, said: “January tends to be the time that individuals are concentrating on paying the tax due for the previous financial year, however it would be wise to consider what tax will be due for the current tax year.

“You should be pro-active and consider how you can potentially reduce future liabilities, particularly with the impending changes to dividend taxation coming in from April 2016, and the changes to pension tax relief that we believe the Chancellor will announce at the 2016 Budget.”

Lee’s top tips to save tax in 2016 include:

1. Taxation of dividends

The taxation of dividend income is changing significantly from April 2016, and it’s likely to impact upon the vast majority of owner managed businesses who remunerate themselves via dividends rather than salary. The tax payable on dividend income will increase from April 2016 but there may be an opportunity to vote further dividend income in the current tax year to reduce the impact of the future changes. Alternatively it may make sense to gift shares to your spouse to enable them to take dividends tax efficiently. There may be other opportunities depending upon your personal circumstances so you should seek advice as soon as possible.

2. Pensions tax relief

It is our understanding that the tax relief associated with pension contributions is higher than the entire defence budget - hence, the Government is currently contemplating ways to reduce the cost of it to the Exchequer. What form this cut in tax relief takes is likely to be announced in the 2016 Budget in March, so there remains an opportunity to maximise the tax relief on pension contributions now, before any cuts are announced.

3. Spouse’s allowance

If you work and your spouse doesn’t or they pay tax at a lower tax rate than you, then you may be missing out on some tax savings if you have investment income. You could make tax savings by transferring savings or shares into your spouse’s name or changing the ownership of investment properties so that the ownership is weighted in favour of your spouse.

4. Marriage allowance

This allowance was introduced in April 2015 but we believe not everyone entitled to the relief has made a claim. The relief applies where the higher earning spouse is a basic rate taxpayer and the lower earning spouse does not use all of their personal income allowance. The lower earning spouse can transfer some of their unused allowance to their spouse, thus saving the family tax.

5. Research and development tax relief

It’s still apparent, from the latest statistics released by HMRC, that many companies, particularly those in the North East are still not making use of this very valuable relief. Many manufacturing and engineering companies are missing out on the relief and if you’re creating or improving technologies or making scientific advancements then you’re likely to qualify for the relief. If you feel you may be missing out, then contact a R&D tax expert to discuss whether you can claim.

6. Who’s going to inherit your estate? And how much are you giving to HMRC?

Nobody likes to think about death, but it’s an inevitable fact that we will all die. Make one of your New Year’s resolutions to undertake a review of your wills and liability to inheritance tax (IHT). We regard IHT as a voluntary tax as there are many ways to legitimately reduce your IHT liability and thus leave more of your estate to your beneficiaries rather than HMRC.

7. Capital gains tax allowance – use it or lose it

Every individual is entitled to realise a capital gain, such as on the sale of shares or property, and up to £11,100 of this for the current tax year is tax free. If you do not use this allowance, you will lose it. Therefore if you have assets which are currently ‘pregnant’ with a gain, then you could consider selling these assets to make use of the allowance. You could then buy back these shares (after 30 days have passed) and assuming that the share price has not increased significantly, you will have uplifted the base cost of the shares tax free. If you feel that the share price may increase significantly over the 30 day period, your spouse could arrange to buy the shares off the market at the same time that you sell the shares to the market, thus keeping the shares in the family. Careful planning is required but you could reduce any future capital gains tax bill by up to £3,000.

8. Make sure your income is declared

HMRC are continuing to invest in increasingly sophisticated software aimed at catching those evading tax or under declaring income. There was even a recent rumour that HMRC will be using social media to look for tax evaders! Recently HMRC has offered several disclosure facilities to certain targeted groups of individuals whom they believe may be under declaring income including lawyers, landlords and plumbers. The idea of the disclosure facilities is that if you come forward before HMRC find you, they will reduce any penalties for the non-declaration of income.

9. The 60 per cent tax trap

If you earn more than £100,000, you may be paying tax at 60 per cent. You won’t find this listed on the HMRC website, but due to the withdrawal of the personal tax allowance for income over £100,000, earnings of between £100,000 and £121,200 will be taxed at an effective rate of 60 per cent for 2015/16. It would be wise to seek tax advice to see if you can reduce the tax payable by taking action prior to 5 April 2016.

10. Looking to raise funds – what about EIS?

If you’re looking to raise funds for your business to drive it forward, why not consider making use of the HMRC approved Enterprise Investment Scheme (EIS). The individuals investing in your business will receive tax relief of up to 30% of the value of the shares that they subscribe for and a future sale of the shares could be free of capital gains tax. While this is a complex area, it should not be discounted and you should seek advice.