Farmers preparing for the end of the tax year on 5 April have a number of options at their disposal to limit the amount of tax they have to pay.
Gary Markham, director of farms and estates at tax planning and accounting firm Land Family Business, says this starts with deciding where to time the financial year end of your business in relation to the end of the tax year.
The tax year ends on 5 April for all businesses in the UK, but business owners can set the end of their accounting year on any date in the year, but this can have a significant effect on the length of time between earning profits and paying tax on them.
Businesses that have their financial year ending before the end of the tax year, such as the commonly used 31 March – five days before – will have to stump up the taxable profits in the tax year ending five days later.
However, those who have a financial year-end falling a month later on 30 April – after the end of the tax year – will be taxed 11 months later at the end of the next tax year.
Mr Markham says this allows a significant amount of extra time for the farmer and their tax advisers to prepare accounts, calculate obligations and carry out tax planning and mitigation.
- Consider when to time the end of your business financial year – can you move it to after the end of the tax year to allow more time for planning?
- Check ISA savings accounts allowance has been used for all partners in the business – £20,000 each
- Consider whether to use the £3,000 tax-free gift allowance
- Maximise your own pension contributions up to the tax-free limit and where appropriate, make an additional pension contribution to a spouse or child with no earnings of their own
- Be aware of the additional annual investment allowance when planning capital expenditure
Potential areas for mitigation
Businesses looking to minimise their income tax bill should make the most of allowances that reduce the amount of income regarded as taxable.
If the business is operating as a partnership, it is important to ensure firstly that each person in the partnership is utilising their personal tax allowance which is £11,850 in the 2018/19 financial year.
Consideration can also be given to transferring income-producing assets to a spouse paying lower rates of tax.
Each person will also be entitled to save up to £20,000 tax free in an ISA and there are also junior ISAs for children, which have an allowance of £4,260.
In addition, up to £3,000 a year can be given away tax-free under the inheritance tax gifting exemption, or £6,000 if no gift has been made in the previous year.
For higher earners, making additional pension contributions can be a useful way of reducing income tax liabilities, particularly to pull income back below a higher tax threshold, says Mr Markham.
Regular personal pension contributions are tax deductible, with annual top-up pension contributions of up to 100% of your net relevant earnings, or £40,000, whichever is lower, permitted in 2018-19.
This should be checked with an accountant, as in some circumstances the amount can fall to £10,000.
This can potentially help keep a high-earning individual beneath the £100,000 threshold when the personal allowance for income tax starts to be withdrawn, or the £150,000 threshold, above which an additional tax rate band starts.
However, individuals can still top up the pension pot of a spouse or child who has no earnings of their own by up to £2,880, which the taxman will then make up to £3,600.
Parents should also consider moving income between one another if one of them has an income of more than £50,000, as that is the threshold above which child benefit begins to be withdrawn.
Businesses that are set up with a company structure rather than in a partnership have different options at their disposal, says Mr Markham.
They are able to make personal pension contributions for directors that will reduce liability providing the payments are made prior to the accounting year end.
Payments to directors can also be made as dividends, as well as salary, with the first £2,000 in dividend income classed as tax free.
Finally, there is 100% tax relief for business expenditure on plant and machinery of up to £1m, after chancellor Philip Hammond raised the threshold from £200,000 in the 2018 Budget.
Machinery purchases can only be set against income in the year the expenditure occurred, and advice should be sought if the purchase was in an accounting period before 31 December 2018 because transitional arrangements are in place.