Loucas

End of Year Tax Planning Tips

By Stuart Shaw
3 min read

With less than a month left of the current tax year, it is time to consider end of year tax planning opportunities.

Pension and Gift Aid contributions

Pension contributions and gift aid contributions made prior to the end of the tax year can help mitigate your tax liabilities – even more so when your income is near certain thresholds. For example, your personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This means that for the income band from £100,000 to  £123,700 the effective rate of tax is an eye-watering 60%. The flip side to this is that if your income is within this band you will get tax relief on pension contributions and gift aid payments at 60%.

Another scenario where additional relief is available is in respect to the withdrawal of child benefit. This occurs when the highest earner in the household’s income exceeds £50,000 and the benefit is clawed back at a rate of 1% for every £100 of income in excess of £50,000. The benefit is fully withdrawn when the individual’s income exceeds £60,000. Pension contributions and gift aid payments within this band of £50,000 and £60,000 will, therefore, attract a higher rate of effective relief. The rate of relief will depend on the number of children you are claiming benefit for.

Tax Efficient Investments

The end of the tax year is the perfect time to consider making tax efficient investments:-

ISAs

A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.

Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA

Venture Capital Trusts (VCT)

These are investment vehicles that are invested in small higher-risk trading companies.

Investments in VCTs attract an income tax relief of 30% of the amount invested. This tax relief will be recouped if the investment is sold within 5 years.

Dividends and capital gains are tax-free.

The maximum annual investment for a taxpayer is £200,000.

EIS/SEIS

These are tax advantaged schemes that involve direct investments into small higher-risk trading companies.

EIS shares attract income tax relief of 30% and SEIS shares attract income tax relief of 50%. The relief is clawed back if the shares are sold or if there is a disqualifying event within 3 years.

Any gains on the shares are tax-free provided they are held for a minimum of 3 years and in most cases are fully relieved from Inheritance tax if held for two years.

In addition to the above, capital gains tax on gains invested in EIS shares where the relevant disposal was either 36 months prior to or 12 months after the EIS investment can be deferred until the subsequent disposal of the EIS shares.

The maximum that can be invested in EIS shares annually is £1M (or £2M for knowledge intensive companies) and for SEIS shares the limit is £100,000.

Inheritance Tax (IHT)

There is an annual £3,000 IHT gift exemption and you can also utilise any unused exemption from the previous year. Gifts covered by the exemption will fall outside of your estate immediately for IHT purposes.

There is also a £250 small gift exemption which allows you to give up to £250 annually to any number of friends and family. Again qualifying gifts will fall out of your estate immediately for IHT purposes.

Gifts to individuals that are not covered by the exemptions are potentially exempt transfers and you would have to survive the gift by seven years for them to fall outside your estate.

Capital Gains Tax

Each individual has a capital gains tax exemption of £11,700 for the year ended 5 April 2019. If it is not utilised then it is lost.

If you have investments standing at a gain you may wish to you consider making an appropriate disposal to utilise the annual exemption.

Alternatively, you may have already made gains in excess of the annual exemption and look to crystallize a loss prior to 5 April to offset against the gain.

Care should be taken if you are looking to bed and breakfast a share (i.e. sell the holding and then repurchase it shortly afterwards). If you repurchase the share within 30 days of the disposal then this purchase is matched with the recent disposal for tax purposes so is unlikely to crystallize a gain or loss as intended.

You could still dispose of a shareholding then immediately have your spouse purchase the same shareholding or alternatively, a SIPP could purchase the shares if you have one.

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you.  If you would like to discuss any of the issues raised in this guide please call 01622 758257.

Self Assessment Tips and Advice

4 min read

Self assessment tax returns can be complicated, with many tax payers struggling to complete these correctly. A recent study found that 735,258 tax returns in January 2020 were submitted less than 24 hours before the self-assessment filing deadline at midnight 31st January.

Legislation changes frequently, meaning that taxpayers risk paying too much tax and/or incurring penalties through failing to get things right.

As more information moves online, and tax becomes more digital, taxpayers may increasingly need help in understanding their obligations, ensuring that the information HMRC holds about them is correct and meeting the increased filing obligations.

Do I need to complete a Tax Return?

The Self Assessment deadline of 31st January 2022 for filing a 2021 Tax Return is fast approaching. The 2020 Return covers the period 6 April 2020 to 5th April 2021.

So how do you know if you should complete a Tax Return ?

If any of the following were applicable to you then you may be required to register for Self Assessment and complete a Tax Return:

  • Were self employed or a partner in a partnership business.
  • Were a company director and received non PAYE income from the company.
  • Had income over £100,000.
  • Received more than £10,000 from dividends or investment income.
  • Received rental income.
  • Had foreign income.
  • You or your partner earned over £50,000 and claimed child benefit.
  • Made a capital gain on the sale of an asset.

HM Revenue & Customs have developed a useful online check which will also help you decide whether or not you need to complete a Tax Return.

If you discover you need to file a Tax Return, the first step is to register for Self Assessment.  The easiest way to do this is through HMRC’s website.  Shortly after registering, HMRC will issue you with a tax reference number (UTR).  You will need your UTR to file your Return.

If you miss the Self Assessment deadline then an automatic penalty will be issued, whether or not you actually owe any tax. Our team of knowledgeable Accountants are on hand to help you. Reach out to us on 01622 758257 or email enquires@loucas.org.uk

How to spread the payment of your Self Assessment tax liability

Your Self Assessment liability has to be paid by 31 January following the end of the tax year, with a possible 2nd payment due on 31 July depending on what your liability is.

There are a number of different methods you can use to actually make the payment, details of which can be found on the HM Revenue & Customs’ website.

As any alternative to actually making the payment in a lump sum, you can spread payment of your Self Assessment liability over twelve months through your PAYE tax code as long as all these apply:

  • you owe less than £3,000 on your tax bill
  • you already pay tax through PAYE, for example you’re an employee or you get a company pension
  • you submitted your paper tax return by 31 October or your online tax return online by 30 December

If you find yourself in a position were you are unable to pay your liability, you should contact HMRC’s Business Payment Support Service as soon as possible, ideally before the payment deadline.  You may be able to agree an instalment plan to settle the debt over a period of time and whilst interest may still be payable, you should be able to avoid the penalty charges.

If you do not agree a payment plan and fail to settle your liability in full by the due date interest will be charged and if paid more than 30 days late a 5% surcharge will be issued.

Reducing your payments on account

Payments on account are payments made towards your eventual Income Tax and Class 4 NIC liability.

Each payment is based on half your previous year’s tax bill and are payable by 31 January and 31 July following the end of the tax year.

You have to make the payments on account every year unless:

  • your last Self Assessment tax bill was less than £1,000
  • you’ve already paid at source more than 80% of all the tax you owe

If you believe your tax bill will be lower than in the previous year, you can ask HMRC to reduce your payments on account.

This can be done through your online digital account or by completing form SA303.

It is possible to reduce the payments on account at anytime, even after the first payment has been made.  This will result in any over payments being refunded.

It should be noted that if you reduce down your payments on account lower than they should have actually been this will result in interest being charged.

You can find out more information about our personal tax services here.

Missed Deadline

HM Revenue and Customs (HMRC) must receive your tax return and any money you owe by the deadline midnight 31st January 2022. You’ll usually pay a penalty if you’re late submitting your tax return. You can appeal against a penalty if you have a reasonable excuse.

If you do not pay the tax you owe for the previous tax year on time, the more you delay, the more you will be required to pay. This is why it is imperative that you pay the tax as soon as you can. The information below details the penalties you will have to pay if your tax return is late. If a partnership tax return is late, then each partner will be required to pay the penalties shown below.

Penalties for missing the tax return deadline:

  • 1 day late: A penalty of £100 which will apply even if you have no tax to pay or have already paid the tax you owe.
  • 3 months late: £10 for each following day – up to a 90 day maximum of £900. This is in addition to the fixed penalty above.
  • 6 months late: £300 or 5% of the tax due, whichever is the higher. This is in addition to the penalties above.
  • 12 months late: £300 or 5% of the tax due, whichever is the higher.

How we can help

Loucas aims to ease the stress caused by self assessment and help you avoid costly mistakes, by offering a complete self assessment service.

We can save you time, worry, and money by handling this process for you. We will do all the necessary calculations, complete your return, and offer advice on how you might better manage your tax liabilities.

We do not believe that dealing with tax correspondence should be stressful or confrontational. We work towards having a constructive relationship with HMRC and believe that this works in the best interests of our clients.

Please do contact us at Loucas for help.  Alternatively, you can reach us on 01622 758257.

Enterprise Management Incentive Scheme (EMI) Options

3 min readAn Enterprise Management Incentive (“EMI”) scheme is an HMRC approved share option scheme aimed at smaller businesses to retain and motivates key employees. This guide will discuss what EMI schemes are and how they work.

So what is an EMI share options scheme ?

A share option gives the right to someone to purchase a share in a business at an agreed price at some point in the future.  Typically, but not necessarily, this would be at the point of sale. The option holder must be an employee of the company and must spend at least 75% of their working time at that company.


Why would you consider using an EMI scheme ?

EMI schemes are becoming more and more popular with businesses with HMRC reporting a marked increase in the number of business implementing the schemes during 2017.

The main reasons businesses consider introducing EMI schemes are to motivate and retain key members of their workforce.

Employees will have a sense of ownership and will also benefit from the increased value of the business.


Is an EMI scheme complicated to implement ?

At the outset there is a procedure that needs to be followed which is likely to require the assistance of professional advisors.
Outline of Procedure:

  • Prepare a market value valuation of the business and agree with HMRC
  • Agree the terms of the scheme and set out in an option agreement
  • Possibly minor amendments to the company’s Articles of Association
  • Grant the options to the employees and get them to sign the option agreement
  • Notify HMRC of the options that have been granted

Other than an annual declaration that has to be made to HM Revenue and Customs (HMRC) each year notifying them of any changes to the options that have been granted there is no on-going work required to maintain the scheme.

Much of the documentation that is mentioned above can be used for further granting of options at a later stage.  It may be necessary to obtain a further agreement from HMRC as to the value of the shares.


What are the Tax Advantages of EMI share options ?

EMI schemes have a number of tax advantages attached to them over unapproved share options.

  • Providing the options have an exercise price which was no less than the market value at the time of granting then there is no income tax or national insurance contributions payable.
  • Once the options have been exercised and sold then the employee will pay capital gains tax on any gain. The gain should qualify for Entrepreneurs Relief which will mean they will be taxed at a rate of 10%.  This is far less than if they were to pay income tax on the gain as they would do for unapproved options, which could be as much as 45% or possibly more if NICs were to become payable.
  • Key employees are likely to stay with the company as the probability of a profitable capital return, motivates them. Employee’s motivation and interests are aligned towards the shareholders and the board when they have a tangible interest in the company’s ownership. As a result, everyone is focused on adding more shareholder value.
  • Employees feel more valued in a share option scheme in the long term. Employees have an incentive to grow of the business and make themselves more accountable.


What will it cost me ?

Typically to implement an EMI scheme will cost around £2,500 to £3,000 plus VAT.  This may vary depending on how many employees are to be included in the scheme.


What are the downsides of an EMI scheme ?

If the trigger point for exercising the options is based around the sale of a business and the owner subsequently decides not to sell this can act as a demotivator for employees as the scheme may no longer be fit for purpose.

There are a number of disqualifying events laid down by HMRC which could affect the tax status of the scheme.  Whilst in most cases these may not be relevant, consideration needs to be given to them when making some business decisions.

The initial setup costs are high if options are only going to be granted to a small number of employees.

How we can help  ?

As an accounting firm, we are able to provide a wide range of services tailored to your particular industry. With over 40 years experience our team at Loucas has set up many EMI schemes for a variety of businesses in numerous business sectors. We have a dedicated team to ensure that you are guided though share option schemes with ease.

We believe by staying up to date with not only current but changing legislation and industry news we are better placed to help our clients and their businesses succeed.

If you would like to discuss you options with EMI share option schemes or how Loucas can assist you please do not hesitate to contact us.

Enterprise Management Incentive Scheme (EMI)

Further Information

The information contained in this publication has been prepared for general guidance and is not intended as advice. Whilst every care is taken to ensure the accuracy of the information, no responsibility can be accepted by Loucas for any loss resulting from acting or refraining from acting as a result of any material in this publication. The information in this publication is not designed as a substitute for seeking professional advice.

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