Minimising tax liability ‘key to cash flow’

Tax allowances and reliefs could be key to helping businesses tackle the impact of the coronavirus on their finances.

“In some ways the planning opportunities presented by the close of one financial year and the opening of another shouldn’t be overshadowed by coronavirus, hard as that may be whilst we are still in the eye of the storm,” says Mike Hodges, partner at Saffery Champness.

As the HMRC deadline is around the corner, taxpayers can utilise allowances and reliefs to reduce tax liabilities.

Loss relief enables self-employed individuals or businesses owners to reduce their taxable income by a maximum of £50,000 per year, or 25 percent of adjusted annual income. Claiming these losses against other income subject to limits could add immediate cash flow.

“For the self-employed, the next benefit is not having to pay the 31st of July 2020 payment on account – but that’s not coming along until the end of July. That’s only deferred until the 31st of January, so they may still need and will still need, if they’ve got losses in their business, to make a claim for that. Otherwise, they’ll just end up with a much bigger tax payment at the end of January next year because that’s only the deferral of that liability – meaning they need to plan their cash flows,” says Hodges.

“What you would want to do is to extinguish a tax liability as far as you can altogether rather than just deferring it.”

The standard annual allowance is £40,000 but this is lowered for high earners. The 2020 Budget stated that the income threshold for the pension tax allowance will increase from £110,000 to £200,000 this year.

The lowest annual allowance has also been decreased to £4,000 for those earning £300,000 or more, starting 6 April 2020.

“Individuals in this income bracket with a workplace pension should ensure their employer reduces their pension contributions in line with the employee’s new allowance so as to minimise any tax liability,” says Hodges.

The recent changes announced by the government come as a relief he says.

“It pushes the limits up and I think it was done deliberately because of this issue that had been flagged within the NHS, ‘Justice for Coronavirus’. It was starting to raise its head because there had been this issue that senior people within the NHS were turning work away because it was going to impact on how much they could put into their pension. In that sense, it’s a good measure.”

Rishi Sunak’s 2020 Budget also promised a reduction in the allowance for Entrepreneur’s Relief from £10m to £1m.

“For those business owners including the self-employed who are struggling under the current economic uncertainty and are looking to the longer term when they might be in a position to sell their business, it may be an opportune moment to consider whether they may be able to pass shares to other family members so that they can, in due course, also benefit from entrepreneurs relief and reduce the impact of this change.

“Transfers between spouses are free of capital gains tax, but transfers to other family members are not.  There may also be other tax implications, so this is an area where proper tax advice should always be taken,” he says.

From April 6, gains on residential properties that do not include the main home must be reported and paid within 30 days of disposal – meaning upcoming disposals should be finalised in the current year as the new rule could dramatically impact cash flow issues, according to Hodges.

Individuals who own company shares can also benefit from dividend allowance.

“If you are a contract worker who owns a PSC but does not work full time or has otherwise not taken substantial earnings over the past year, perhaps as a consequence of the disruption to trading caused by coronavirus, your dividend allowance may not be fully utilised and will be lost if action isn’t taken by April 5,” adds Hodges.