Everything you need to know about tax planning

This blog will look in detail into what is meant by the term tax planning, whilst also giving you examples and best practises.

Definition of tax planning

In short, tax planning is the method of analysing your personal financial situation from a tax perspective. Tax planning plays a key part in your overall financial plan as it gives you the ability to ensure you are being as tax efficient as possible.

Why is planning important?

Tax planning is very important, as it can help to reduce tax liability and maximise eligibility to contribute to retirement plans, which are both crucial.

When done correctly, income tax planning can significantly reduce the amount of tax that you have to pay. By setting out a plan for your income tax, this will enable you to take advantage of any opportunities that may arise that can minimise your tax bill. In addition to this, personal tax planning can also highlight other options such as capital gains tax and inheritance tax.

Important note #1 – Tax planning should play an integral role in the broader look at your overall business taxes.

Earnings and income tax planning

Effective income tax planning can offer you ways to save in two different areas.

As an employee of a business, you may be offered various employee benefits, which may include tax advantages. When it comes to tax planning, you should assess what the value of such benefits have and the effect they have on overall tax.

Important note #2 – Income tax planning is very important when it comes to company cars as this can involve a significant tax charge.

However, what is just as important is carefully considering both the value and consequences that tax relief has on pension contributions, no matter whether these contributions are made by your employer, yourself or both of you.

Important note #3 – As a company director, paying into a company pension scheme is tax deductible and using your annual allowances can be a great way of saving tax and planning for the future.

When doing income tax planning, you should be keeping adequate records and preparing for income tax returns. Whether you are self-employed, a company director, a high earning employee or have complex tax affairs, a self-assessment tax return must be completed.

Savings…

It is imperative that when income tax planning, the treatment of income tax and savings must be taken into consideration. Examples of simple yet effective income tax planning are setting up ISAs or transferring any savings you have to a spouse, as these methods will eliminate or reduce income tax and capital gains tax.

If you have a high income or a large amount of savings, you may want to consider other options. For example, you can benefit from tax breaks by investing in venture capital trusts or unquoted shares that are qualified under the Enterprise Investment Scheme. Another option is making pension contributions on behalf of your children, as this can offer great tax advantages.

Do you own your own property?

If you are a property owner, you are likely to pay stamp duty when you buy a property and you will be liable for any council tax. Owning a property is different from other investments, as your main home is actually exempt from capital gains tax.

However, if you own more than one home, you are liable for capital gains tax. This is also the case if you own investment properties, land, business premises or use your home to generate income e.g. renting it out. When owning a property, income tax planning is key, as tax treatment can be very complex and you may be exposed to capital gains tax.

Examples of how tax planning has helped our clients…

Here are a few examples of how we are helping our clients with tax planning:

• We have asked all our limited company clients to consider adding additional shareholders, (spouses and children only), to their business as they can have £5000 of dividend income tax in 2016/2017 and 2017/18 tax free and £2000 from 2018 onwards.  In the current tax year each shareholder that is added saves you £375 in tax.
• Lots of clients come to us to ask advice about company cars, currently these can be a good way of paying for a benefit for yourself as a director or employee and incurring a small amount of tax. If you buy the right type of car with lower emissions this can be better than paying for the car out of your taxed income.

Talk to us

We’d be more than happy to talk to you further about tax planning. Simply fill in the form below and we can arrange an informal chat either over the phone or in person (free of charge and no obligatory)