Have you considered mid-year tax planning so that you can take action in time to maximise your allowances and save tax? Mid-year tax planning is around October and there is less than 6 months till 17/18 tax year ends. A lot of people overlook things during the tax year and do not take action which causes them to not take advantage of available allowances and they receive a high tax bill. We are going to share some tips on what you need to consider at this time of the tax year to make the most of your entitled allowances.
3 Major Allowances You Need to Consider
- Pension Contribution – If you are paying tax on the 20% threshold, every £80 you invest in your pension pot, the taxman will top-up £20. It is effectively 25% return of investment. No other investment will give a good return as this and it is relatively stable. Despite your income level, you will always need to consider this type of allowance first. For most small businesses, it has now become an obligation for employers to contribute pension to their employees if they are an eligible worker. This type of contribution is funding your retirement and it is funding your future. Even if you could squeeze around £15 per month to your pension pot, that small amount will build up and eventually will give support your lifestyle when you retire. Currently the annual allowance is £40,000. It will be reduced when your income is over £150k. So consult your financial advisor if you consider investing relatively high amount of it.
- ISA Allowance – You might want to consider having some savings which is something that everyone can afford to do. A type of savings account is an ISA that is available at the moment. For 17-18 tax year, you can invest up to £20,000 worth of funds into an ISA. There is a cash ISA available as well as a stocks and shares ISA. The interest and dividends you earn from that particular ISA wrapper is tax-free as well. You do not have to have a lot of money in order to start saving, every small contribution counts. In reality, cash ISA can be very useful for when you are considering some emergency funds. It is easily accessible and the interest in it is tax-free.
- Venture Capital Trust – This allowance does require more amount of money and is relatively high-risk but the reward is really good. Every £10,000 you invest in a VCT, you receive £3,000 as a tax relief which means you get cash back from the government. It is a government scheme and the money goes towards UK start-up companies. It is a government incentive to encourage people to invest in UK businesses because these are the type of businesses that are very ambitious. The government wants to boost the prosperity and wants these companies to grow. Running a business is not always easy, most small business owners will have a brilliant idea but they might need a certain amount of capital which a VCT can provide.
If you can afford to invest then this is something you can consider, especially if you are earning more than £100,000 as an employee. This can help to reduce tax bill for someone who cannot form a company to run their business and have to be a sole trader but also earn a significant amount of profit. The downside is that you are investing in a small business and it is not always stable, it can be very risky therefore you would always need to consider your risk profile. If you are interested in investing then do seek for professional advice on this matter as a financial advisor will analyse your risk profile. There are different types of investments out there and it is not a good idea to put all of your money into a VCT so you do need to spread out your investments. This is to ensure that you always have some investments to lean on when one goes wrong. Once you have invested, the money will be tied up for at least 5 years, in order for you to keep the tax relief, which means that if you have some immediate cash needs then this is not an option that you should consider. However, if that is not the case then once the small companies grow and pay dividends, the dividends you receive are tax-free.
Things You Need to Double-Check
There are other situations that are quite common and should not be overlooked. If you are an employee you need to double-check if you have made sure your tax code is correct. For example, if you have a wrong tax code and are earning £70,000 but your tax code is BR this means only 20% can be taken from everything you earn which. This means you are under taxed which is a situation that you would want to avoid so do check your tax code if you are on PAYE.
If you are self-employed and the business has just started to take off, you can consider restructuring and looking out for the tax deductions so you do not miss out on them.
P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me