Getting your money’s worth: how to cash in on the tax system

For those running a veterinary practice, plenty of factors should always be considered when it comes to HMRC at this time of year. Let’s start with income tax.

Yen-Pei Chen, a corporate reporting and tax manager at the Association of Chartered Certified Accountants, advised to watch out if you are approaching a tax threshold, or find yourself in a marginal relief band. She said: “If you are one of these lucky souls, you may want to act to put your tax affairs in order before 5 April.”

Ms Chen pointed out the thresholds for the 2017-18 tax year you need to be aware of include:

• A higher rate income tax band – anything above £45,001 is taxed at 40%.
• A high income child benefit charge threshold, which means child benefit begins to be clawed back once income exceeds £50,000.
• A personal allowance reduction threshold, where the personal allowance of £11,500 is reduced by £1 for every £2 above £100,000.
• An additional rate income tax band, where income above £150,001 is taxed at 45%.

Breach any of these and you will pay more tax, Ms Chen said.

“In addition to these, two new tax allowances became available from 6 April 2016,” she added. “They’re good news for some, but a mixed blessing for others, so it’s well worth being aware of them.

“The first concerns dividends above £2,000 [down from £5,000 for 2016-17]. If you receive dividends above this amount – for example, likely for the owner-manager of an incorporated practice who extracts profits from the business in the form of dividends – your dividend income will be hit with a higher rate of tax. The effective rate for tax on dividends for higher-rate taxpayers went up to 32.5% and, for company owners, considering the effect on corporation tax, the effective tax rate is 46%.”

The other allowance concerns interest income. Ms Chen outlined the change: “A tax-free savings allowance has exempted up to £1,000 of savings income from tax since April 2016 – but note, if you are a higher-rate taxpayer, you will only be exempt up to £500.”

So, bearing these thresholds in mind, what are the legitimate tax planning options to avoid an eye-watering tax bill? Ms Chen said five areas should be targeted:

• Deferring your income to the following year if you expect a lower level of income.
• Making pension contributions for yourself and your family.
• Transferring shares or bonds to your spouse to make the most of the dividend nil band and savings allowance.
• Switching your investments into tax-efficient investment schemes.
• Making donations to charity.

Several ways exist to reduce a practice owner’s tax bill while keeping essential cash in the business.

Carry back trading losses

Ms Chen said: “If you’re self-employed, any trading losses you make in the year can either be set against your other income as a current year tax deduction, or carried back against income in the previous tax year to reduce your previous year’s tax liability (and gain a cash tax refund).

“If you’re new to the world of self-employment, losses for the first four tax years of trading can generally be carried back for up to three tax years.”

Ms Chen noted if you run the practice through a company, trading losses can be set against your other current year income, carried forward or carried back against trading profits for the preceding 12-month period.

Interestingly, corporation tax sees some changes as the Finance Bill 2017 reforms the loss relief mechanism from April 2017. Ms Chen said, on a positive note, it means you will be able to offset trading losses against all types of past or future profits. However, the loss you can offset in any given year will be restricted to 50% of the taxable profits for that year.

Optimising your capital losses

Ms Chen looked next to any capital loss you make from selling your assets in 2017-18 – they will automatically be set against your taxable income for that year first.

She said: “After that, you can elect for any remaining capital loss to be carried back to the previous year, or do nothing and let the loss be carried forward indefinitely against future years.”

The advice here is if you make a capital loss, you may want to think about using part of it in another year to ensure the loss is relieved at a higher rate of tax. Bypassing the maths, this is all about setting the loss against income at the most effective tax rate – you may pay tax at 10% this year, but have paid tax at 20% in, say, 2016-17 or expect to pay it at 40% in 2018-19.

Sole traders should note the maximum amount of capital losses they can carry back is £50,000, or 25% of the income for that year, if that is higher. Companies are not allowed to carry back capital losses, however.

Reliefs on gains from asset disposals

If you have been lucky enough to make a profit on selling an asset (such as the freehold of your practice), and that asset was used for business, you may be able to delay paying tax on any capital gain using the Business Asset Rollover Relief.

This relief applies if you buy new qualifying business assets within three years after selling the old business asset or up to one year before selling the old business asset.

Ms Chen pointed out to sole traders everyone has a £11,300 tax-free exemption for capital gains in 2017-18. She said: “This exemption can’t be carried forward to future years, so if you have made any gains in the year, make sure you use it before you lose it. You may wish to transfer assets to a spouse or civil partner to make sure you both fully use your tax-free exemptions.”

If you run your business through a company, the chancellor announced in the 2017 Budget that, for disposals of assets on or after 1 January 2018, indexation allowance will be calculated using the Retail Price Index or factor for December 2017. This means relief will no longer be available for inflation accruing after this date in calculating chargeable gains made by companies.

Effectively, this brings the corporation tax treatment in line with the income tax treatment, but it will increase the corporation tax bill on disposals in the future. If you are thinking about selling off an asset over the next year, you may wish to bring forward your plans to avoid a larger-than-expected tax bill on your gains.

Tax-free pension contributions

For most people, making pension contributions is a tax-efficient way to put money aside. Not only do you get tax relief on your pension contributions, changes have also made pension schemes more flexible, allowing you to draw down the pension pot before retirement.

When you pay into a pension, you receive tax relief on your pension contributions. The tax relief is at the highest rate of income tax you pay. Limits exist as to what can be paid in.

Pensions and business

If you own your business, making pension contributions to yourself is a great way to extract value from it. On top of the personal income tax relief, pension contributions give corporation tax deductions to the company.

Furthermore, because pension contributions are a non-taxable benefit, both the company and the employee can save on national insurance contributions. If you are an employer and company owner, it is well worth thinking about exchanging some of your own and your employees’ salaries and taxable benefits for larger pension contributions.

On this, Ms Chen offered a note of caution. She said: “If you have a large pension pot [above £1 million, the lifetime allowance] or have a taxable income above £110,000, you can be affected by some changes from 2016, so think about seeking professional advice.” The lifetime allowance rises from £1 million to £1.03 million from April 2018.

Getting more out of your investments

Lastly, with savings interest rates in high street banks still low, you may be considering ways of making your money work harder for you. Some investments might prove a tax-efficient alternative to savings.

One recommendation from Ms Chen would be to load up your ISAs, to benefit from tax-free income and capital gains. She noted: “Adult UK residents can put up to £20,000 each into savings, investments or a combination of both. In addition, parents can pay up to £4,128 per child into a junior ISA. First-time buyers can now save up to £200 per month above four years in the new Help to Buy ISA, and get a 25% tax-free bonus capped at £3,000 for £12,000.

“There is also a lifetime ISA, which allows savers to put in up to £4,000 per year [counted as part of the annual £20,000 ISA limit] until they’re 50. This can then be used to buy a first home – although, note, if you have both a lifetime ISA and a Help to Buy ISA, you can only use the Government bonus from one of them to buy your first home.”

Several other tax efficient investment schemes also exist, such as the enterprise investment scheme, investing directly in an unlisted company, venture capital trusts, the Seed Enterprise Investment Scheme, Innovative Finance ISAs and social investment tax reliefs. It is worth noting they are high risk, so consider these options only if you are a seasoned active investor.

The parting advice from Ms Chen is clear: “Plan ahead, take good advice from your advisors and take a measured approach to tax planning. Leaving your tax planning to the last minute could prove a costly mistake.”