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Tax year end planning tips for business owner clients

21 January 2020

From pensions and profits to company cars, there are numerous opportunities to help your business owner clients ahead of tax year end in 2020…

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There is almost a feeling of old times about the 2019/20 tax year end. For the first time since 2017, the Budget is going to occur in the run up to 5 April (set for 11 March).

It will be an important Budget because it is the first of the new Parliament. Research from the likes of the Institute for Fiscal Studies suggests that immediate post-election Budgets are the time when taxes go up on the logical, if cynical, basis, that they are furthest away from the next general election.

The Chancellor has already watered down his fiscal rules but has little financial wriggle room and faces some awkward problems. For example, he has lost tax revenue from December’s Loan Charge climb-down and must find a long-term solution to the NHS staffing issues caused by the annual allowance. Lurking in the background is the question of how to replace self-employed Class 2 National Insurance Contributions, something that prompted a rapid U-turn following his predecessor’s first Budget.

All of which means planning is best finalised before the Chancellor gets to his feet. So, what might that planning include?

Pensions

Whether a business is incorporated or run on a self-employed basis, the first few months of the calendar year are the time to consider pension contributions. Two points to watch are:

  1. Carry forward: This will be the last opportunity to carry forward any unused annual allowance from 2016/17, when the annual allowance was (as now) a maximum of £40,000. To access that unused allowance, initially the available allowance for 2019/20 must be exhausted. The uncertainty about what the Budget might contain on the annual allowance makes a mop up of all unused annual exemption a more tempting proposition this year end, but doing so could run up against the next point.
  2. Tapering of the annual allowance: The annual allowance is tapered in 2019/20 if an individual’s ‘threshold income’ exceeds £110,000 (broadly speaking this is taxable income from all sources less the gross amount of any relief-at-source pension contributions) and their ‘adjusted income’ exceeds £150,000 (same as above but plus any employer pension contributions). If both thresholds are breached, the annual allowance is reduced by £1 for each £2 adjusted income exceeds £150,000, subject to a minimum of £10,000 (where adjusted income is £210,000 or more). An obvious way to sidestep taper is to limit threshold income, which is more in the control of a business owner, particularly the company director, than the average employee. If large contributions are being considered, it can pay to change some from corporate to personal contributions to avoid taper even though, as a general rule, company contributions are more tax/NIC efficient (see case study below). One tripwire to be wary of is the money purchase annual allowance. If that has been triggered, e.g. by taking an uncrystallised fund lump sum, then carry forward cannot be used and money purchase contributions are limited to £4,000.

Case study: Sidestepping taper

Ann’s business has had a good year after a trio of difficult ones which had forced her to restrict her company’s pension contributions since 2016/17. She now has accumulated carry forward from 2016/17-2018/19 of £80,000 which she would like to exploit. Her earnings and dividend for 2019/20 will amount to £105,000, to which must be added estimated investment income of £10,000, making her threshold income £115,000.

  • If her company pays more than £35,000 to her pension, then tapering will be triggered because the company contribution will take her ‘adjusted income’ over £150,000.
  • The maximum contribution the company could make without triggering an annual allowance charge for Ann is £91,667 - £80,000 carried forward and £11,667 2019/20 tapered annual allowance.
  • If Ann makes a personal contribution of £5,000 gross, then her threshold income will reduce to £110,000, taper will not be triggered and her company will be able to pay £115,000 (£80,000 carried forward and £35,000 being the balance of Ann’s 2019/20 untapered annual allowance).

In practice Ann would be advised to contribute more than £5,000 because she cannot afford to find her investment income has been underestimated. If she needs the contribution ‘paid’ by her company, she could draw a dividend to cover her net cost after 5 April (so that it arrives in 2020/21).

Drawing out profit

For company directors with no IR35 issues, it remains the case that in nearly all circumstances, it is better to draw out profits as dividend rather than bonus, as the table below shows.

This table looks at how £1,000 of gross profit translates into net income for non-Scottish taxpayers, assuming that the £2,000 Dividend Allowance and the Employment Allowance have been used elsewhere.

  Basic rate taxpayer  Higher rate taxpayer  Additional rate taxpayer 
   Bonus (£)  Dividend (£)  Bonus (£)  Dividend (£)  Bonus (£)  Dividend (£)
 Gross profit   1,000.00  1,000.00  1,000.00  1,000.00  1,000.00  1,000.00
 Corporation tax  n/a  -190.00  n/a  -190.00  n/a  -190.00
 Employer NIC  -121.27  n/a  -121.27  n/a  -121.27  n/a
 Bonus/Dividend  878.73*  810.00  878.73*  810.00  878.73*  810.00
 Employee NIC  -105.45  n/a  -17.57  n/a  -17.57  n/a
 Income Tax  -175.75  -60.75  -351.49  -263.25  -395.43  -308.61
 Net income  597.53  749.25  509.67  546.75  465.73  501.39

*£878.73 x 13.7% = £121.27 which when added to the bonus paid (£878.73) equals a total company cost of £1,000.

Waiting for the next financial year will make no difference to the corporation tax charge, as during the election the Conservatives said they intend to reverse the currently legislated for corporation tax cut to 17% due in April.

Dividends have the added advantage of providing more net income per £1 of gross income, as the table above demonstrates. This net/gross ratio difference is a point worth bearing in mind when several tax thresholds, such as the tapering of the personal allowance, are primarily driven by gross amounts.

Annual investment allowance

The annual investment allowance (AIA) for plant and machinery is currently £1m, but is currently due to revert to £200,000 from 1 January 2021.

If a business’s financial year straddles the calendar year, a pro-rata calculation applies. For example, if a company’s year end is 31 March, the AIA for its financial year ending in March 2021 will be £800,000 (£1,000,000 x 0.75 + £200,000 x 0.25). The timing of large investments may therefore deserve a year-end review.

Company cars

The basis of company car taxation will change on 6 April 2020, when new WLTP-based scale charges are introduced for newly registered cars and the treatment of hybrids is revised (for all ages of vehicle) to take account of electric-only range.

The difference in scales can mean there is a tax saving to be made by registering a new car before 6 April, in which case it will be taxed under the NEDC-based scale charges.

The deferral of the Budget and a new government gives extra impetus to year end planning in 2020. The sooner advisers alert their business clients, the better.

How can the Zurich Intermediary Platform help?

Whether it is paying an additional single contribution to maximise an existing client’s Retirement Account pension allowance, making a payment to an existing ISA, or setting up a regular contribution to use future allowances, it can all be done online.

There is no client signature required when the ongoing adviser charge is being maintained at the existing level. A direct debit mandate will be required if appropriate.

There are no additional platform costs associated with this tax planning exercise and these contributions (including pension relief at source) are all pre-funded, making sure your clients’ money is working for them as quickly as possible.

As we approach the tax year end, timing is important to ensure the transactions are completed on time. We have also published a schedule of platform deadlines for the 2019/20 tax year to help.

Find out more about the Zurich Intermediary Platform

The tax position will depend on the personal circumstances of the investor and tax rules may change in the future.

For use by professional financial advisers only. No other person should rely on or act on any information in this article when making an investment decision. This article has not been approved for use with clients.

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This content was last reviewed in January 2020