Our Top Tax Planning Tips to Help You Reduce Tax Liability Legally and Compliantly
The Spring Budget has left many business owners feeling the pressure of navigating tax changes in 2023. In fact, in the most recent ONS Business Insight Report, Taxation was reported as the 3rd biggest concern for business owners in 2023. With various increases to taxation and reductions to allowance, it really comes as no surprise.
In true supportive Shenward style, we want to help you feel more in control of your taxes in 2023. That’s why we’ve gathered tax planning tips from our expert team to help you reduce your tax liability both legally and compliantly.
Tax Changes in 2023
We’ll first recap the tax changes occurring in 2023 which were announced in the recent budget and in late 2022 budget, covering both personal and business taxation, and Investment and Expenditure taxation and the associated allowances.
- Reduction of Additional Rate Income Tax Threshold – those earning over £125,140 will be taxed at 45% on anything over that figure, 40% on anything between £50, 271 and £125,140, and 20% on income between £12,570 and £50,271.
- Capital Gains Tax – the tax-free allowance reduces in April 2023 from £12,300 to £6,000. In April 2024, this allowance will further reduce to £3,000. The tax rates for property sales will remain at 18% for basic-rate and 28% for higher-rate. The tax rates for other asset sales will remain at 10% for basic-rate and 20% for higher-rate.
- Private Pension Tax Thresholds – the amount that you can save in your pension before it becomes subject to tax is increasing from £40,000 to £60,000. It applies to all private pensions only.
- Vehicle Excise Duty – The VED rates for cars, vans and motorcycles will increase from 1 April 2023, but not for Heavy Goods Vehicles – the VED rate will remain frozen for 1 year for these vehicles.
- Income Tax Repayments – under new legislation from 15 March 2023, applications to assign a due tax repayment to a third party will be rejected because it is now illegal to transfer a tax repayment to someone other than the taxpayer or their spouse/civil partner.
- The main rate of Corporation Tax for taxable profits over £250,000, will increase from 19% to 25%.
- Companies that have profits between £50,000 and £250,000 will pay corporation tax at rate of between 19% and 25%.
- Dividend Allowances are being cut significantly. From 6th April 2023, the amount of dividends you can take tax free is £1,000 per annum. In April 2024, this will be reduced further to £500.
- Multinational top-up tax and domestic top-up tax – Large global groups with over £750 million in global revenue and who have an effective tax rate of less than 15% will be subjected to new tax rules for accounting periods beginning on or after December 31st, 2023. Read the full rules here.
- Plastic Packaging – the rates of tax on plastic packaging have increased from 1 April 2023, meaning UK manufacturers of plastic packaging, importers of plastic packaging, business customers and consumers who buy plastic packaging or goods in plastic packing will be exposed to higher prices.
Investment and Expenditure Allowances
- Capital Allowances – from the 1 April 2023 to 1 April 2026, if a company invests in qualifying plant, machinery or technology, these can be deducted from taxable profits through full expensing. This means a 100% deduction for assets in the general pool and a 50% deduction for assets in the special rate pool.
- The Annual Investment Allowance – the qualifying expenditure amount has been capped at £1,000,000 from April 2023, meaning that this is the maximum amount you can deduct from your taxable profits.
- Electric Vehicle Charge Points – the first-year allowance has been extended for an additional two years. This means that people or businesses who invest in a charging point for the first time can deduct the cost from their corporation tax or personal tax bill within the next two years.
- Research and Development – a complete R and D tax relief reform is now in effect as of 1 April. Changes to the legislation, eligibility and claim process should be reviewed in depth here.
- Seed Enterprise Investment Scheme – the amount of investment a company can raise via the SEIS is to increase to £250,000 in 2023 – up from £150,000. What’s more the annual investor limit is to be doubled to £200,000 as to support the new raise amount and encourage investors to invest.
- Company Share Option Plan – those who qualify to offer CSOP to employees will be allowed to issue up to £60,000 of CSOP options to their employees which has doubled from £30,000 last year.
- Real Estate Investment Trust – changes will be made to enhance the REIT regime and its rules from April 2023. One; the requirement for an REIT to have a minimum of three properties where one commercial property worth $20m or more is present has been removed. Two; the tax deduction rule from property income distributions paid to partners is set to be removed.
- Charitable Reliefs – UK charity reliefs will now be restricted to UK-based only charities and CASCs. Those not in the UK who have already been approved for reliefs will have a year transition period. The taxes affected are income tax, Capital Gains Tax, corporation tax, inheritance tax, Stamp Duty, SDLT, Stamp Duty Reserve Tax, Annual Tax on Enveloped Dwellings (ATED) and Diverted Profits Tax.
- AETD and SDLT – temporary reliefs from AETD and the SDLT 15% rate will apply to those with dwellings that were made available to people who had been given the permission to stay in the UK via the Homes for Ukraine Sponsorship Scheme. AETD relief will apply to charges on or after April 1, 2022, and SDLT relief will apply from 31 March 2022.
As you can see, there’s a lot changing. And, the Spring Budget 2023 revealed more changes are set to be introduced in the future – though they don’t appear in the Spring Finance Bill, they were revealed in the Budget. That’s why it’s important – whether for yourself or your business – to follow recommended tax planning processes.
What is Tax Planning
Tax planning is quite simply the process of arranging your affairs – making a plan – in order to legally minimise tax liability.
You’ll notice we emphasised the word ‘legally’, and that’s because contrary to popular belief, there are several ways in which individuals can legitimately reduce the amount of tax they are or will be liable to pay.
How to Get Started with Tax Planning
Tax planning requires a deep understanding of what taxes a person or company will be liable to pay, knowledge of the various reliefs and provisions on offer in the UK, and a perfect understanding of compliance and legislation. That’s why, Tax Planning Strategies are almost always developed and managed by Tax professionals or Accountants.
However, that being said, there are certain things you can do yourself with a little guidance – guidance just like you will find below.
Tax Planning – Tips for Individuals
Tax planning as an individual is all about ensuring you are accessing the right reliefs and allowances, as well as managing your income and investments.
Here’s how you can make the most of these this tax year:
Review your private pension contributions – did you know, the amount you can put into a private pension without being taxed has now increased to £60K from £40K per year. If you’re the type of person that likes to plan for the future and save as much as possible for retirement, it will be music to your ears that you can invest an addition £20K of your annual income into your pension without being taxed. A little bonus too – The lifetime allowance has also been abolished, so you can continue to pay into your pension without the worry of being penalised later down the line.
Assess your eligibility for Marriage Allowance – Marriage Allowance is a scheme which allows married couples or civil partners to benefit from increased personal tax thresholds if one partner/spouse is earning less than the annual personal tax threshold. Basically, if one partner/spouse is earning £11,310 or less per year, they can make a claim to transfer the remaining £1260 of the tax-free allowance to their partner or spouse, which is then applied to their salary allowing for an extra £1260 of their annual income to be tax free. There are a number of criteria to meet to be eligible, but the good news is, if it is found you are eligible, you can request the last 4 years be assessed and potentially receive a tax rebate for these previous years.
Make sure you’re being smart with savings – there are now so many allowances to utilise from a savings perspective that it makes sense to be smart with how and where you save. Traditionally, people had just one savings account, but since the introduction of ISAs, Shares and Premium Bonds, there’s more choice than ever as to where to invest in your future. Let’s recap the different allowances:
- ISA Allowance – you can save £20,000 per year across multiple or one ISA without being taxed on the income you put in there.
- Savings Allowance – you do not need to pay tax on the first £1,000 you receive in interest from your savings (only applies to basic rate taxpayers)
- Starting Rate for Savings – complicated, but helpful to those on low incomes. If you are earning less than £17,570 and have a personal allowance of £12,570 then you will be eligible for an increased amount of tax-free interest on savings. The amount of tax-free interest you can receive is £5,000 but this is for those who earn £12, 570. For every £1 you earn over the £12,570, £1 is deducted from the amount of interest you can receive tax free.
- Junior ISA- you can put up to £9,000 per year in a Junior ISA for your children without incurring CGT or Income Tax on the interest.
- Premium Bond Winnings – if you purchase premium bonds and win, you can receive tax free winnings of between £25 and £1million.
As you can see, it makes sense to be smart with your savings. If you have one big savings pot, it might be worth exploring moving the monies to multiple in order to benefit from the above allowances.
Tax Free Childcare Scheme – is your childcare provider part of the Tax-Free Childcare Scheme? If they are, you could be eligible for up to £500 every three months towards the cost of your childcare for each child (and £1000 if the child has a disability). How this works is you set up an account online for your child and make payments directly to your childcare provider through it. For every £8 you pay in, the government will add £2 for you to use to cover the childcare costs. There are obviously certain criteria you must meet, and certain other benefits you cannot be claiming, but it could be that it’s a better option for you. Head over to https://www.gov.uk/tax-free-childcare to find out more.
Check if you’ve overpaid tax – since the introduction of Making Tax Digital, it’s become a whole lot easier to be in control of your tax code. In the past, access to our own tax affairs was quite limited, and an understanding of our tax code was harder to obtain. It could be that you overpaid tax and didn’t realise. Whilst HMRC is competent in their calculations of tax, tax code errors often occur when they don’t have the correct information about taxpayers and their working arrangements. To assess whether you’ve overpaid tax, fill out the claim form here https://www.gov.uk/claim-tax-refund.
Utilise relevant company perks – whilst most company benefits are taxable, there are a number of perks which businesses offer in replace of receiving a set amount of your salary which aren’t subject to tax.
These are usually the following:
- Childcare Vouchers
- Cycle to Work Scheme
- Annual Travel Passes for Public Transport
- Goods your employer sells as long as they are at least the value of what it cost them to make.
It’s always worth speaking with your employer to see if any of these are offered. If you do receive them, the income you are then taxed on is the income you receive after the value of these perks has been deducted.
Check if your employer offers tax free payments for homeworking – if you work from home as part of your contractual agreement with your employer and not as a benefit, you may be entitled to receive a small weekly payment from your employer without paying tax or NI on it. Employers are legally allowed to make payments of up to £6 per week to employees from 5 April 2020, if the employee has incurred reasonable additional costs because they work from home, for example increased gas and electric usage.
Utilise Tax Free Expenses – expense policies are put in place for employees for a reason – so that you can reclaim monies you’ve spent which you wouldn’t have normally spent if you weren’t in a particular work situation. However, most of these are usually either taxable or must be reclaimed in the form of tax relief. But there are some which aren’t. The most common expenses you can claim for without being subjected to tax and can receive directly from your employer are:
- Travel costs incurred when required to travel to a location not your usual place of work
- Food purchased when required to be away from usual place of work
- Expenses incurred as part of business meetings where you are not responsible for people within the meeting such as client’s lunches etc
It’s always worth revisiting your contract and company expense policy to understand what can and cannot be reimbursed.
Switch Your Company Car – do you benefit from a company car? When was the last time you checked the renewal date or terms of upgrade? It’s always worth asking your employer if you’re not sure as those who renew and opt for a car with lower CO2 emissions could benefit from a reduced tax liability. If you’re car isn’t due or is unable to be renewed, why not work out whether it would be more cost effective to purchase your own car and give up your company car. You can still claim an allowance for business mileage – and this just might work out cheaper than the tax applied to fuel in your company car paid for by your employer.
Tax Planning – Tips for Businesses
It’s no secret that tax rates for businesses and business owners are increasing all round this year. But that doesn’t mean to say there’s nothing you can do from a tax planning perspective. We’ve listed below just some of the things you can do to legally reduce your tax liability in 2023.
Reduce your plastic packaging usage to either 0 or less than 10 tonnes per year – There is a special exemption on Plastic Packaging Tax for manufacturers and importers of less than 10 tonnes of plastic packaging per year. What’s more, reducing your overall environmental impact as a business could come with other benefits, such as access to environmental reliefs and schemes specifically for businesses.
Review your income structure – if you’re the Director of an owner managed business, now is the time to assess your profit extraction strategy. With Corporation Tax and Dividends Tax and allowances changing from April 2023, it might be the case that moving to a higher salary through PAYE and cutting your dividends reduces the amount of tax due at the end of the year – both CT and PT. Speak with your accountant who can do both calculations for you, so you can compare.
Check your self-assessment tax return – every self-employed person obtaining an income – however small – must complete a self-assessment tax return each year. Whilst is advised to seek help from an accountant with these, it’s also advised that you have involvement in the preparation. There may be various business expenses that you can reclaim such equipment bought, subscriptions and working from home, which your accountant may not know you’ve incurred (N.B. this usually happens when regular accounting isn’t done via a digital accounting system linked to a bank or when business expenses are paid for via personal accounts.)
Estimate your tax liability ahead of time – there’s never been a better time to plan ahead. If you’re keeping monthly management accounts and creating forecasts, it could be a good idea to work out your tax liability ahead of time. Whilst you can’t make it completely accurate, it will give you a good idea what you can expect to pay if things go as planned. If cashflow allows, you can then allocate certain profits to things which will improve/enhance the business, such as plant and machinery, which can be deducted against taxable profits.
Consider remuneration for key personnel – taxable benefits for key personnel within the business not only provide little extras to your employees, but also reduce the amount of profit in your business which is subject to tax. There are a number of taxable benefits you can explore, with the most common right now being electric company cars.
Consider whether a group structure would work– Do you have multiple divisions within your business that could in fact operate as separate companies within a group? It could be worth switching to a group structure. Why? The change in corporation tax rates means that profits above £50k will be taxed higher than 19%. So, if a group structure is in operation, profits can be transferred to other companies in the same group to reduce the tax rate for each company and therefore the overall amount of tax. It’s worth noting however, that it must make business sense to have a group structure, otherwise it could be classed as tax evasion.
Access tax credits – certain businesses are eligible to apply tax credits if they are making a positive contribution towards the economy. The three main tax credits are R and D Tax Credits, Land Remediation, multiple dwelling SDR, and Film Tax Credits. Each of these, if eligible, allow for monies claimed to be applied to your overall tax liability, thus reducing your bill.
As you can see, there are many steps you can take to reduce your tax bill, whether a business owner or an individual.
The most important thing to remember is that even with Tax Planning, you must remain compliant. Tax Evasion and Tax Avoidance are criminal offences.
If you need any support with creating a Tax Planning Strategy, please reach out to our expert team.