As the weather becomes a little milder and the evenings begin to draw out, you might start to think about doing a spot of spring cleaning. But before you set about clearing out the garage or sorting out the garden shed, there’s something more important you need to do first:
Make sure your tax affairs for the current tax year (2020-21) which ends on 5th April 2021, are in order.
With just a few weeks to go, it’s still not too late to check that you’ve claimed everything you’re entitled to, to make sure you’re set up to be as tax-efficient as possible, and to make sure you’re not going to have to pay any more tax than you need to.
To help you, we’ve put together an essential checklist. It’s not exhaustive, and because everyone is subject to their own unique circumstances, we recommend you speak with your accountant or tax advisor for personalised advice on minimising your tax liability.
Have you used your full tax-free annual allowances?
Make sure you claim any personal tax-free allowances to which you’re entitled. These will include your personal allowance for income tax (£12,500 for the current tax year) and, if you’re married, your marriage allowance.
You can share any unused personal allowance with your spouse or civil partner if one of you is a basic rate taxpayer and the other’s income is below the personal allowance threshold.
Are you up to date with your state pension contributions?
Retirement may still seem a way off yet, but if you’re to receive a state pension, you need to keep your contributions up to date. To be eligible for the full basic state pension, you’ll need to have 30 years of National Insurance contributions.
Have you considered your annual ISA allowance?
Depending on your situation, investing in an ISA (Individual Savings Account) can reduce your income and capital gains tax liability. If doing so makes sense, you need to act now and not leave it too late. In the 2020-21 tax year, the maximum you can save in ISAs is £20,000
Are you a shareholder? If so, have you looked at your tax-free annual dividend allowance?
If you’re a shareholder, you can earn some dividend income each year without paying tax. Currently, the annual tax-free dividend allowance is £2,000. This allowance is available to everyone, regardless of whether they pay basic rate, higher rate or even no tax at all, and for this reason, it could be worth reviewing the shareholding structure of your business and considering making your spouse, civil partner or another close family member a shareholder.
Do you have any directors’ loans to report?
If you’re a shareholder and company director and your company has made you an interest-free loan, you must treat the loan as a ‘benefit in kind’ and report it to HMRC, along with other expenses and benefits on form P111D. You’ll also need to pay Class 1A National Insurance on the value of the benefit.
Is your business structured for optimum tax efficiency?
Coming up to the end of the tax year is an excellent time to consider your business’s structure. You may have set up initially as a sole trader or as a limited company because it suited your circumstances at the time, but things change. Is the structure still right for you? Is it the most tax-efficient solution?
It’s sensible to review your business status regularly to make sure it matches your needs. Both options carry different legal and reporting responsibilities and impact the way you receive payment and how you’re taxed.
If you’re self-employed, is it time to invest for tax relief purposes?
Many self-employed businesses have their financial year-end in late March or early April to coincide with the end of the tax year. If this includes you, now is a good time to review your position and take advice from your accountant or financial advisor. It might make sense to divert some of your income into investments so that you will get the benefit of tax relief.
If you’re in the construction industry, do you have CIS to recover?
If you operate a limited company that has Construction Industry Scheme (CIS) tax deducted from you at source, you need to recover any tax that’s owed to you.
You can reclaim CIS you’ve suffered by completing an end of year PAYE P35 return and writing to HMRC to request funds be paid to your company. As long as your business has sufficient retained earnings in its accounts, you can extract these funds as a dividend or in another form of remuneration.
Are your earnings about to tip you into a new tax threshold?
With only a few weeks to go to the end of the tax year, it’s a good idea to check your earnings aren’t about to exceed a threshold that will result in you having to pay more tax.
If your earnings are just about to tip you over an annual income of either £50k – the point at which you’ll begin to have to pay the 40% higher rate of tax on your earnings (and also when child benefit begins to taper off); or £100k – the point at which your personal allowance begins to drop by £1 for every £2 earned over £100,000, you should speak to your accountant or financial advisor. They’ll be able to advise you on how to mitigate your tax liability – perhaps by contributing to your personal pension pot or a registered charity, for example.
The end of the tax year is almost here. Are you sure you’re not going to receive a tax bill that’s higher than it needs to be? It’s not too late to review your end of year position and make sure it’s as tax efficient as it can be.
If you take action now, there’s still time for Inca to carry out an end of year tax review and make sure you pay no more tax than you have to. Call us now on 01235 868888 or email us at [email protected].