Whether it’s for your business or your personal tax, you could benefit from tax planning.
Tax planning uses incentives provided by the Government to make the most of your money, ensuring you only pay the tax you have to.
That’s very different from tax evasion, which abuses gaps and loopholes in tax law to illegitimately keep tax money.
If you’re new to tax planning, you need to know some of the basic ways you can save.
Creating a plan to exit your business is a bittersweet moment for many – you probably feel proud of what you’ve built and sad to be stepping back.
However you’re feeling, it’s imperative that you make a plan, and use the best tools available to you.
Your business is part of your estate, which includes all the money, assets and property you own. Once you die, the parts of your estate above £325,000 will face a 40% inheritance tax charge.
Business owners who want to pass on their business will, therefore, give it away during their lifetime as a gift for tax purposes.
But gifts will also be taxed if they are made during the final seven years of your life. A business, assets or shares that have been sold for a lower price than they are worth to a successor is also considered a gift.
There are many tax implications in succession planning, so we would definitely recommend an accountant’s insight.
Often an unpleasant thought, this is a necessary task. You may have specific ideas for any inheritance you wish to leave to your loved ones.
But without careful estate planning, your beneficiaries may end up paying a lot more in inheritance tax than you hoped they would.
There are some ways you can prevent an enormous tax bill, including making annual gifts, although you can only make gifts of up to £3,000 each tax year.
The gifts will then be removed from your estate, lowering its value and, therefore, the tax that may be applied on it.
Again, just watch out for the seven year rule, which will see your gifts face a larger bill the closer they were given to your death.
Individual savings accounts (ISAs) are a great and well-known way to make tax savings, as the interest received on your balance is tax-free.
Many people use them for their personal savings, as well as for their children or grandchildren.
Of course, these accounts have limits as to how much you can save each tax year. The main two types and their limits are:
- ISA – If you’re a UK resident over 18, a limit of £20,000 can be saved.
- Junior ISA – £9,000 per year can be saved per child.
Bear in mind with interest rates at a near all time low, ISAs should be used in conjunction with other money-saving strategies.
If you’re married or in a civil partnership and one of you earns below the personal allowance threshold, but the other pays basic rate tax, you might be able to benefit from marriage allowance.
Under the scheme, the lower earner can transfer 10% of their personal allowance to their spouse/civil partner.
This gives the basic-rate payer tax relief of up to £252 this year (as of the 2021/22 tax year).
This can also be backdated for up to 4 years, as long as the lower earner hadn’t earned more than their personal allowance threshold.
Planning for your retirement is essential. And doing it properly through a pension – rather than a standard savings account or hiding cash under your mattress – means you’ll make use of the tax relief involved.
UK residents can contribute up to £40,000 to their pension fund each year without facing a tax and, under the right circumstances, may be able to carry forward any unused allowances from the previous three years.
Our main advice is to double check how much of your allowance you have used to make sure you’re not going over it.
Your Next Steps
Don’t worry if you haven’t thought about tax planning yet – you’re not alone, as many business owners either don’t know about all the incentives available or are unsure about taking the plunge alone.
Tax incentives are all completely justified and only exist to help you.
To find out how tax planning can help you and your business, contact us today.