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Have you been accessing Covid finance support? End of year tax planning is essential!

by Michael Blaken

Published on 11th January 2021

Businesses accessing Government financial support during the ongoing Covid crisis should make end of year tax planning a priority.

That’s the view of the expert Swindon accountants’ team here at Optimum Professional Services. We believe limited company directors and – in particular – sole traders and partnerships should take steps between now and the end of the financial year in April to identify their likely tax exposure.

Grants such as the one-off £10,000 available for small businesses with premises, and the Self-Employment Income Support Scheme for sole traders and partners may result in larger than usual tax bills falling due next year. This could be at a time when cashflow is tight and all business support has ended.

We have a number of clients, for example, who received the small business grant and who also applied for one or more rounds of the SEISS payments, because their businesses had been adversely affected by Covid.

However, these grants all count as taxable income so must be added to their profits. If their year-end falls in the early months of the tax year – April, May, June for example – then they are always paying tax based largely on the previous year’s profits. Regardless of the year-end, all of these business support payments are added to the profits in the year and for some these amounts may be higher than the dip in profits from the impact of Covid.

Tax review and planning

Through a careful tax review and subsequent planning, the overall liability could be reduced, or as a minimum the client made aware of the future tax liabilities to leave plenty of time to save for the tax payments that will be due.

We have been advising our clients to put away 20 per cent of any Covid grants, if they can, to help cover their tax bill and also supporting them with tax planning to ensure they can meet their obligations.

Tax planning steps you can take

  • If you have an ISA, make sure you have paid in the maximum to make use of the tax free allowance available. The allowance for 2020/21 is £20,000 which can be spread across up to four different ISAs:
    • Cash ISAs
    • Stocks and shares ISAs
    • Innovative finance ISAs
    • Lifetime ISAs.
  • If you have control over your level of income, ensure you have made full use of your personal allowance, which for 2020/21 is £12,500.
  • If you are a shareholder, ensure you’ve taken your tax free dividend allowance, which is currently £2,000.
  • The annual Capital Gains Tax allowance is £12,300. However, if you have already reached your CGT allowance, you might want to defer further sales until the new tax year.
  • Pension contributions are £40,000 per year per person. If you haven’t reached this, you might want to pay in more before the new tax year. Personal pension contributions increase your basic rate band, which allows more income to be taxed at basic rate. Employer contributions act as an expense in the company, reducing taxable profits.
  • If you are part of a couple, look at income equalisation to mitigate your tax liability by keeping as much of the joint income as possible in the basic rate tax band.
  • If your spouse has little or no income, reviewing the 10% Marriage Allowance is an easy, useful tool to save some tax.
  • Think about making donations to charities. More than ever before, charities’ funds are depleted, and making Gift Aided donations can save additional tax for higher rate tax payers.

If you would like some help or advice with end of year tax planning, please get in touch with Swindon accounts here at Optimum.

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