The arrival of tax season always seems to catch us off guard, and if you're anything like most people, you may not have completed your tax return yet. However, this delay not only increases the risk of late penalties but also means that you may be missing out on potential opportunities to reduce your tax exposure.
Even with the looming 31 January deadline, there are still last-minute ways you can use to reduce your tax bill. So take a deep breath and read on for some helpful insight.
Navigating the tax system can be overwhelming, especially when it comes to planning for the future and maximizing your savings. With so many complex rules and regulations, it's easy to feel lost and unsure of where to start. But with a few simple strategies and a bit of knowledge, you can take control of your finances and keep more money in your pocket.
Five last-minute ways to reduce your tax bill:
- Mitigate your liabilities with tax planning for businesses an individuals
- Claim all of your eligible tax reliefs and allowances
- Claim allowable businesses expenses (don't forget mileage)
- Complete your self assessment before the deadline
- Work with a professional
1. Tax planning for businesses and individuals
It's probably no surprise that we've put tax planning at the top of our list, it is central to saving when it comes to tax season.
What is tax planning?
Tax planning involves examining financial situations with the objective of reducing tax liability. It requires taking measures to guarantee that you take advantage of all available allowances, reliefs and deductions while complying with tax laws and regulations.
The benefits of tax planning
| Maximise savings through a reduced tax bill | Understand your tax obligations |
| Make well informed financial decisions | Plan for the financial year ahead |
Don't let the complexity of the tax system hold you back - by taking advantage of tax planning, understanding your obligations, and claiming all eligible reliefs and allowances, you can reduce your tax liability and make well-informed decisions for the future.
How do you tax plan efficiently?
Tax planning goes beyond figuring out what your end-of-year tax liability will be and how you’ll pay your taxes. It's also about taking the time to review your financial position, understand your tax obligations and create a strategy that will generate the best possible outcome.
When it comes to dealing with tax, leaving things until the last-minute can often mean missing opportunities to use the tax reliefs and allowances available. Don’t forget… if you don’t use it, you lose it so it’s important to act before the end of the tax year.
Tax planning for businesses
As a business owner, there are a number of ways that you can reduce your tax liability through tax planning, mainly through tax reliefs, allowances and credits such as Capital Allowances, Incorporation, and Research and Development Tax Credits (we'll look more at this in the next section).
Of course, these are not the only ways to reduce your tax bill. Working with your tax advisor will certainly uncover additional methods that are relevant to your particular circumstances.
Tax planning for individuals
It’s important to remember that the money you save through effective tax planning can be used towards your personal goals. The more you can save when it comes to tax time means the more you can invest in your future.
There are a number of opportunities for individuals to ensure they're receiving the most from their tax allowances and reliefs. Pension Contributions, Inheritance Tax Allowances, and Capital Gains Tax Allowances can often be forgotten about at the end of the tax year.
2. Claim all eligible tax reliefs and allowances
Remember to claim all of the tax relief and allowances that you are eligible for, this will vary depending on the individual or business - and some options may not be feasible so late in the year.
When you're rushed to meet a submission deadline it can be easy to overlook these potential ways to save:
Businesses
Capital allowances
Capital allowances can be claimed when you purchase assets that are kept and used in your business; this may include company vehicles, equipment and machinery.
Two types of common capital allowances include:
The Annual Investment Allowance (AIA)
Introduced in 2008, Annual Investment Allowance (AIA) allows business owners to claim tax relief on assets purchased for the business. You can deduct the full value of qualifying equipment from your business’s profits before tax.
There is a set annual limit for how much AIA can be claimed by a business, this has been temporarily increased to £1,000,000 from 1 January 2022 to 31 March 2023.
You can only claim for an item in the period that it was purchased.
Full expensing
The government introduced full expensing in the 2023 Spring Budget, replacing the previous super-deduction which ended on 31 March 2023.
This tax incentive allows businesses to claim a 100% first-year allowance on qualifying investments in plant and machinery, thereby reducing their taxable profits. Full expensing can be a great opportunity for businesses to save on taxes and invest in their growth.
R&D tax credits
Research and Development (R&D) Tax Relief is a UK tax incentive designed to encourage companies to invest in innovation and provides cash incentives by way of repayable credits or corporation tax reductions.
Whilst the rules on what is considered R&D are complex, many businesses are undertaking qualifying activities without knowing it - it is therefore worth checking with us if you think there may be scope.
It's important to note that the criteria for what qualifies as R&D can be intricate, and many businesses may be engaging in eligible activities without realising it. It's worth consulting with us to explore the potential opportunities for your business.
There are two R&D schemes but for most clients, they will qualifying for SME R&D relief. This relief allows for an additional 86% deduction of qualifying costs from profits, in addition to the standard 100% deduction, resulting in a total deduction of 186%. Additionally, if the company is in a loss-making position, it can claim a tax credit worth up to 10% of the generated loss.
Something to consider: Incorporation to a Limited Company
It’s common for most businesses to start-up unincorporated (i.e. as a sole trader or partnership).
The business structure you choose can have a significant impact on your tax liability and in many cases incorporation to a limited company can have tax advantages.
3 tax benefits of setting up a limited company:
-
Sole traders and partnerships pay income tax on profits whereas limited companies pay corporation tax which is currently at a lower rate
-
With a combination of personal income from a limited company via salary and dividends, this tends to be the most tax-efficient means of operating for owner-managed businesses
-
Incorporating prior to the end of the tax year can also have a cash flow benefit in the reduction of payments on account because the income tax charge for the following year as a limited company tends to be lower (as the company takes some of the tax burden by way of corporation tax)
Individuals
Inheritance Tax gift allowances
Tax-free gifts are another way that individuals can help mitigate some of their tax exposure.
Annual gift allowance
Each tax year individuals are allowed to give away up to £3,000 worth of assets or cash without it being added to the value of your estate, referred to as your 'annual exemption'.
If you have an any unused annual exemption, this can be carried over to the next tax year.
Other ways to give
-
There is no Inheritance Tax on gifts to your spouse or civil partner, and you can give a spouse or civil partner as much as you like during your lifetime as long as they are domiciled in the UK.
-
Gifts you give to charity do not incur Inheritance Tax
-
The small gift allowance allows you to give up to £250 per person tax-free each year, with some exclusions if the person has been gifted under a different allowance
Capital Gains Tax allowances
Capital Gains Tax (CGT) is charged when you sell or dispose of an asset and make a profit. You are only taxed on the amount you gain from the sale, not the full amount you receive.
UK residents are able to make a certain amount of capital gains each tax year before being charge CGT, you should ensure that you are using your allowance before the end of the tax year.
Capital Gains Tax: Annual exemption for individuals 2023-24
| Individual Allowance | £6,000 |
Tax-efficient pension contributions
Annual pension allowance
Ensuring you’ve made full use of your annual pension allowance is an important way to save tax. The current allowance allows some individuals to invest up to £60,000 a year before tax is applied.
Often you can also use unused allowances to top up your pension within a three year timeframe.
End of year retirement planning
The end of the tax year is a great reminder to review your retirement plan and consider if what you have in place now is still meeting your retirement objectives.
You should book some time in with your accountant or financial advisor to discuss the tax reliefs and investment opportunities available that will give you the best possible outcome.
3. Claim allowable business expenses
If you have a business, you can claim on expenses directly linked to the running of your organisation. These expenses reduce your taxable income and are an effective way to reduce your overall tax bill.
This may include items such as:
- Office rent and utilities (if your office is separate from your home)
- Business travel costs, including mileage
- Tools, supplies and equipment used in your work
It's important to remember that if an item or expense is used for personal reasons as well as for the business, it would not be allowable.
Be sure to keep all of your receipts and records on hand as proof of purchase.
4. Complete your self assessment before the deadline
The deadline to complete your self assessment is 31 January and (if you didn't already know) HMRC will impose penalties if you don't submit on time - and continue to charge fees until you do. On of the easiest ways to reduce your tax bill? Don't incur penalties - get your return in on time!
5. Work with a professional
As the tax deadline approaches, it's important to take control of your finances. While the five tips we've shared are a great starting point, we always recommend seeking guidance from your accountant or financial advisor to ensure that your return is completed accurately and that you're maximising your savings.
Collaborating with a tax expert allows you to develop a personalised tax strategy that caters to your individual or business needs, empowering you to achieve your financial objectives and safeguard your financial future.
Working with a professional ensures that you're able to complete your self-assessment, resolve any issues that may arise, and keep HMRC happy. Additionally, they can bring extensive knowledge and expertise in key reliefs such as capital allowances and R&D tax credits, guaranteeing that your exposure is minimised.
This blog was updated on: 15/05/2023
This blog was originally published on: 30/10/2022
Disclaimer Rates of reliefs and allowance are based on date of blog publication. Please confirm all rates with your professional financial advisor before taking any action.
The information shared on the DSA Prospect Limited website and social media accounts (inclusive of all blogs, communications, graphics and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. We always recommend that you speak with qualified professionals where necessary before making any decisions.