1. Take advantage of the Marriage Allowance
For the 2020/21 tax year, the basic personal allowance is £12,570. However, there are many ways to take advantage of the basic personal allowance and make it work in your favor. One way the system works in your favour is if you are married, and either partner has an income below the Personal allowance.
Married couples and those in civil partnerships can transfer 10% of their personal allowance to their partner. This reduces the tax paid by up to £252.00 in the tax year.
Your income is £11,500 and your Personal Allowance is £12,570, so you do not pay tax.
Your partner’s income is £20,000 and their Personal Allowance is £12,570, so they pay tax on £7,430 (their ‘taxable income’). This means as a couple you are paying Income Tax on £7,430.
When you claim Marriage Allowance you transfer £1,260 of your Personal Allowance to your partner. Your Personal Allowance becomes £11,310 and your partner gets a ‘tax credit’ on £1,260 of their taxable income.
This means you will now pay tax on £190, but your partner will only pay tax on £6,170. As a couple you benefit, as you are only paying Income Tax on £6,360 rather than £7,430, which saves you £214 in tax.
Who is eligible for this?
You can take advantage of the Marriage Allowance if:
- You are married or in a civil partnership
- Your income (or your partner’s) is below the basic personal allowance You (or your partner) pays income tax at the Basic Rate (income between £12,570 and £50,270
You can only claim Marriage Allowance if you are married or in a civil partnership. You cannot claim if you are only cohabiting.
2. Tax-free summer breaks for your kids
Summer holidays – HMRC is reminding parents who have set up Tax-Free Childcare (TFC) accounts that they aren’t only for regular childcare costs. You can, for example, also use them to pay for after-school or summer childcare costs, such as accredited holiday clubs, childminders or sports activities.
Tip – As an employer TFC can be good news for you too. It can help prevent you from being short staffed in school breaks if employees are able to use TFC to help pay for care for their children during work hours.
TFC terms reminder – TFC accounts are for children aged up to 11, or 17 if disabled. For every £8 you pay in the government adds £2 up to a maximum of £500 every three months, or £1,000 if your child is disabled.
3. Maximise dividends when you can
Coronavirus has played havoc with dividends as a profit extraction method for owner managers of some companies and may have put them at a tax disadvantage for some time to come.
As a director shareholder of your company general tax advice to maximise tax and NI efficiency is to take a modest salary (up to the NI secondary threshold of £8,840 per year) and top it up with dividends. The trouble is dividends can only be paid by your company from its profits.
Trap – No profits means no dividends . Therefore, when your company is making losses and you rely on income from it you’ll either have to take more salary, which is costly in tax and NI contributions, or borrow from it. This can also be tax inefficient depending on how you repay the debt.
Maximising dividends – In uncertain times like these it can be tax and NI efficient to take as much by way of dividends when profits allow even if you have no immediate need for the cash.
If there’s uncertainty over the future profitability of your company it can be advantageous for it to pay out as much as it can as dividends. If you don’t need all the cash you can leave the excess in the company as a credit to your director’s loan account and draw it later without triggering any further tax or NI bills.
4. Trivial & Tax Exempt Benefits for your employees
Thinking of giving a gift or benefit to your employees? Before you start handing out cash, or buying luxury gifts, it’s important to understand how trivial and tax exempt benefits work.
Trivial Benefits: Directors can provide up to £300 per year in ‘trivial benefits’ such as vouchers. These have to be in amounts of no more than £50 i.e. 6 x £50 vouchers.
Note : director’s partners, as long as they are also on payroll can have the same. This however, cannot be ‘regular’ as this could be deemed as contractual and therefore subject to PAYE and NIC.
When do I not have to pay tax on trivial benefits?
- If it cost you £50.00 or less
- It isn’t cash or a cash voucher
- It isn’t a reward for their performance (bonus etc)
- It isn’t in their contract and it isn’t regular
Tax Exempt Benefits: Don’t get too excited as there aren’t many but some of the more common ones are mobile phones, workplace parking, childcare vouchers, subsidised canteens, annual events up to £150 per employee (available to everyone).
5. Keep-fit tax incentive for company owners
Because of the pandemic you let your gym membership lapse but you’re about to renew it. Is there a tax break relating to sporting facilities if your company provides them?
If your business meets the cost of your gym membership it can claim a tax deduction for the expense, but only where it counts as a benefit in kind for you. Usually, this means you’ll pay tax and your company NI on the value of the benefit. However, there’s a special exemption for “recreational benefits”. The bad news is that membership of a public gym fails one of the main conditions for the exemption.
If the conditions for exemption are met there would be no tax or NI liabilities, while your company would still be entitled to the CT deduction.
The exemption applies where your company provides or makes available to you or your family, recreational facilities and the following conditions are met:
Condition A. The facilities are available generally to all your employees.
Condition B. The facilities are not available to members of the public generally.
Condition C. The facilities are used wholly or mainly by persons whose right to use them is employment-related. The effect of this condition is to limit the exemption to employees, former employees and the families of either.
Note. Condition B isn’t broken if the facilities are available to visiting workers from another business.
DIY and rented gyms
The good news is there are a number of ways you can make use of the exemption for gym facilities. You could:
- create a gym on your business premises, say in a spare room, for use by you, your employees, and your families
- create a gym at a separate premises away from your business, e.g. in rented accommodation, as long as it’s not a residential property
- rent a public gym for a short periods during which only you and your employees could use it.
6. Pay increases – avoiding the OpRA rules
In 2017 HMRC clamped down on the use of salary sacrifice (optional remuneration) arrangements (OpRAs) which offer perks instead of salary as a way of reducing tax and NI. What can we do now?
Salary sacrifice and other OpRAs
It could be possible to reduce the cost of giving your employees a pay rise by using a salary sacrifice arrangement. HMRC calls these and similar schemes optional remuneration arrangements (OpRAs). The main feature of OpRAs is that an employee receives a low or zero tax benefit in kind in exchange for giving up some of their salary. To counter this ‘unfair’ (in HMRC’s eyes) tax avoidance, special rules were introduced in April 2017. These eliminate the income tax and employers’ NI advantage of OpRAs.
Tip – The anti-avoidance rules don’t apply to some types of OpRAs. For example, those where an employer pays for pensions advice or provides a bike to an employee through a cycle-to-work scheme.
Tip – Even if the OpRA rules apply there’s still a financial advantage for employees. This is achieved because, unlike salary, employees don’t pay NI on the benefits in kind. An OpRA can therefore save an employee whose salary is no more than the NI upper limit (£50,270 for 2021/22), 12% of the value of the benefit or 2% if their salary is greater.
Benefits instead of pay
What’s often overlooked is that it’s still possible for you to offer tax and NI-efficient perks as an alternative to a salary increase (but not a sacrifice of existing salary) without being caught in the OpRA trap. The OpRA rules apply in two situations; these are described as types A and B:
Type A. These are arrangements under which an employee gives up the right, or the future right, to receive an amount of cash earnings, e.g. salary, chargeable to income tax in exchange for one or more benefits in kind (perks).
Type B. These are arrangements under which the employee is given the choice by their employer between earnings and a benefit and opts for the benefit.
Tip – It’s easy to think that the OpRA rules prevent you from providing tax and NI-efficient benefits instead of salary. They don’t. If an employee doesn’t have the right to choose between receiving salary or benefits then neither A nor B applies and so the benefits aren’t subject to the OpRA rules.
E.g. Perk Limited is in the process of reviewing its employees’ salaries for 2021. The last 18 months have been financially tough for the business but it wants to reward its employees. To keep down the cost of increased remuneration for its team, it wants to offer them benefits in kind instead. It surveys its employees to find out what types of perk they would like. Perk Limited rewards its employees with their preferred benefits. Because the employees had no choice between a salary increase or the benefit the OpRA rules don’t apply.
Tip. The arrangement in our example shows the whole “pay” increase given in the form of benefits. However, Perk Limited could give it part in salary and part in benefits without triggering the OpRA rules, as long as its employees don’t have a choice about which they receive.
7. Inheritance Tax on gifts received – How it works
A few years ago one of your parents made a gift of assets to you to reduce their estate for inheritance tax (IHT) purposes. They recently died and their solicitor says that you might have to pay tax on the gift. Who pays this?
You may be aware that if an individual makes a gift to someone there’s no inheritance tax (IHT) to pay at the time. The gift is known as a potentially exempt transfer (PET). The trouble is, if the person who made the gift dies in the following 7 years the potential exemption is lost and the gift becomes chargeable to IHT.
Trap – The legislation says that it’s the recipient of the gift who must pay the IHT. What’s more, they are required to notify HMRC within a year following the end of the month in which the person who made the gift died.
Tip – If you’ve received a gift of money or other assets from someone who dies within the following seven years, check with your advisers.
How much tax?
Where a PET you’ve received becomes chargeable to IHT, it doesn’t automatically mean you’ll have tax to pay.
A gift made within the 7 years before death becomes chargeable to IHT, and if there’s any tax to pay it’s the recipient who’s liable for it. However, IHT is only payable if the value of all gifts made in the seven years before death add up to more than the IHT annual exemption plus nil rate band; £3,000 and £325,000 respectively.
8. Have you considered Employee Management Incentives (EMIs)?
If you are looking for ways to help incentivise your team as you build back from the pandemic and grow further, an attractive way to do this could be through an approved EMI Option scheme.
A company will grant options to an employee. The share options give the employee the right to buy shares within a specified period at a fixed price. In order to qualify for favourable tax treatment, the options must be exercisable within 10 years of grant.
Within 10 years the employee will exercise their option and will buy shares in the employer company at their agreed option price. In most instances there will be no tax on the exercise of the option.
The only tax usually charged on the employee will be capital gains tax when the employee eventually sells their shares.
There are many things to consider when thinking about how this could work and unfortunately these options are excluded from some industries entirely.
9. If EMIs aren’t appropriate, could ‘Growth Shares’ work?
A growth share is a special class of share which seeks to incentivise the employee by allowing them to share in the future growth of the company. The shares are issued with particular rights which only allow them to share in the value once a certain threshold, or hurdle, is met. The shares are usually structured so that the current value of the company is protected for the existing shareholders, and the employee’s growth value is only realised when the company is sold. The value realised is then subject to CGT as a share disposal.
The shares are flexible as they can be issued in any company and there are no restrictions over the company activities, the amount of shares issued, or who can be issued with shares.
Example – Your client amends its articles of association and creates a new class of growth share that has no rights at all, other than to participate in the proceeds of sale pro rata with the ordinary shares, but only on a sale above £1 million. There are 90 ordinary £1 shares in issue belonging to the owner, and 10 new £1 growth shares are issued to the sales manager who pays par value for the shares.
If the company is sold for £2.5 million, the first £1 million of proceeds will belong to the owner, with the sales manager being entitled to 10/100 (10%) of the remaining £1.5 million. The end result is that the manager is entitled to £150,000 but the gain is subject to CGT and not income tax.
The fundamental characteristic and attractiveness of a growth share plan is that the value of the shares when issued is negligible so that the employee can afford to purchase the shares outright. The shares then flower in value once the hurdle is met.
The initial value is low because the shares have no rights to participate in the sale proceeds of the company until the hurdle is exceeded, meaning they will have little intrinsic value at the outset.
10. What are Employee Ownership Trusts (EOTs) all about?
Where a controlling interest in a trading company is sold to an employee ownership trust (EOT) and the necessary qualifying conditions are met, there are capital gains tax reliefs for the seller and also the ability to pay bonuses free of income of up to £3,600 per year to employees. Pentins explain EOTs in detail
Therefore, using EOTs for succession planning can allow the owner of a business to pass on the company to the employees of the company for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs or private equity backed buy-outs and may be more attractive given the reduction in the maximum amount of business asset disposal relief available from March 2020.
A qualifying EOT is set up with a trustee and the shareholders in the trading company sell more than 50% of the current share capital to the EOT under a share purchase agreement for market value as determined by an independent valuer. The purchase price is left outstanding as a debt owed by the EOT to the vendor shareholders.
The trading company will use existing reserves and future profits to make payments to the EOT and the EOT will pay the deferred consideration to the former owners over a period of time.
If you want to talk to one of our expert tax advisers, book a call today.