Almost everything we do in life is subject to taxation. We pay Income Tax on the money we earn, VAT on the goods and services we buy, Capital Gains Tax on the possessions we sell, Corporation Tax on business earnings... this list goes on.
Many accountants offer a tax planning service to help clients find where they might be paying too much, and to make alterations where necessary.
On this page
What is tax planning?
Tax planning is a way of ensuring that a person or business's finances are being managed in the most tax efficient way possible, in order to reduce bills and save money.
All the methods qualified accountants use are entirely legal. Accountants simply draw upon their experience and expertise to work out tax-efficient strategies for finance management.
Tax planning for individuals
Whether you are employed or unemployed, if you have some form of income or savings then you may benefit from careful tax planning. Accountants can offer advice and guidance on the following tax-related matters:
Whether you are thinking about your will or deciding how to handle a gift from a deceased loved one, an accountant can advise on the most tax-efficient route to take. Have you considered the rules around annual inheritance tax exemption? Did you know that gifts to charities and political parties are tax-free? And that you could spread your gift out across a number of years to save tax on a lump sum? An accountant will take you through all of the options so you can choose the way that saves the most money.
Capital gains tax relief
Did you know that most people living in the UK are eligible for tax-free allowances on Capital Gains Tax? This is known as the Annual Exempt Amount and it allows a certain amount of gains per year before tax is deducted. You may also be liable for exemptions if you:
a. Are an executor or personal representative of a deceased person's estate.
b. Are the trustee for a disabled person.
An accountant will be able to advise you on your eligibility for the Annual Exempt Amount of capital gains taxes, as well as all of the rules and deadlines.
Tax planning for retirement
There are a number of tax-saving opportunities available for those approaching retirement. Many individuals facing retirement will be preparing for a significant drop in income and will therefore need to be extra stringent when it comes to saving money. Hiring an accountant to help reduce your taxes throughout retirement, which could end up saving you a great deal of money. An accountant will talk about:
- Starting a pension - Investing money in a pension scheme is a good way of saving money due to the tax relief on contributions. The fund will increase tax-efficiency and you can take part of the sum as tax-free cash.
- Using ISA allowance - Because savings and investments are valuable to the UK economy, the government choose to reward people who invest in savings. ISAs allow customers to save up to £10,6802 tax free (and usually with higher interest).
- Offshore bonds - If investors keep their bonds for longer than 10 years without making any withdrawals, they are entitled to receive their investment earnings tax free.
- Tax Status - Transferring your assets to a lower tax-paying civil partner or spouse could save tax (although ownership would officially pass to them).
Are you making the most of government tax credits? An accountant can talk you through the rules and regulations regarding eligibility and help you get the most from your situation.
What is a tax credit?
A tax credit is a payment made by the government to those who either:
- Take care of one or more child/young person (you do not have to be working to receive these).
- Working on a low income (depending on how much you earn and how many hours you work).
How much is a tax credit?
The amount of tax credits you get vary, depending on a number of factors including:
- How many children you live with.
- Whether or not you live with a partner or spouse.
- Whether you work/how many hours you work.
- Whether or not you pay for childcare yourself.
- If you are any child living in your house has a disability.
- If you are over the age of 50 and coming off benefits.
Higher earners are subject to income tax of 45% on earnings over £150,000. If you are a high earner, you may wish to think about redistributing your wealth in a more tax-efficient way. An accountant can guide you through all of the options available, from exchanging income to dividends or current assets to long term investments.
Tax planning for businesses
There are many choices available when it comes to running a business. How do you know which choice is going to save you the most tax? For instance - is it more tax efficient to run a sole trader business, a partnership or a company? If you run a company - what is the most tax efficient way to pay yourself?
Tax for sole traders and partnerships
Sole traders and partnerships are not required to pay Corporation Tax, however they do have to pay Income Tax on their profits (which could be set at a higher rate).
This means that although Corporation Tax is more complicated, you could be wasting money on Income Tax by not registering as a company.
Tax for limited companies
Setting up a limited company is generally regarded as the most tax efficient way to start a business. Although paying Corporation Tax can be a rather complicated process, the rate is set as a standard 20%.
When considering tax planning, your accountant may advise you on certain tax-efficient remuneration schemes, the most common of which is paying dividends instead of salary.
'Dividend' is quite simply the term used for the portion of profits that goes out to a company's shareholders. A dividend is a means of remuneration; a reward to investors for their contributions.
Company directors often choose dividends as a means of remuneration over salary for the following reasons:
- Whereas salary must be paid out regardless of how well the business is doing, dividends are only paid if the company is in profit. If the company makes a loss, or doesn't manage to make a profit in a certain amount of time, then dividends simply cannot and will not be paid. This offers an extra safety net for struggling companies, who won't have to pay remunerations if they can't afford to.
- Often, and especially with small to medium companies (referred to as SMEs), the shareholders are the owners. Tax rates on dividends are usually much lower than income tax rates.
It is therefore more cost effective for a director to pay themselves by splitting their earnings between dividends and salary. Directors can keep their salary as low as possible to keep the costs of National Insurance and Income Tax down, and pay the rest of their wage in dividends.
How an accountant can help with tax planning
If you feel like you could be paying too much in taxes, you can hire an accountant to investigate. Whether you need help with personal finances or business accounts, a qualified accountant can explore ways to help you save money on tax. To find out more about how accountants work and what to expect, please visit our FAQ section.
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