Date posted: 22nd Dec 2020
As we near the end of 2020 and with finances stretched, Lee Watson, tax director at Clive Owen LLP, asks whether it is time to finally consider undertaking that tax planning that you keep putting off, particularly with a budget on the horizon.
Lee said: “There is a Budget planned for 3rd March 2021, which could see a raft of tax increases to replenish the depleted reserves of the Treasury. The tax take could be increased by simply increasing rates or reducing allowances, so there may be an opportunity to save tax, now and in the future, by taking action sooner rather than later.”
Lee’s top tax tips for 2021 for individuals and businesses include:
1. Claim the working from home allowance.
Many people will have worked from home, in the current tax year, and incurred additional costs in relation to electricity and heating. The government will allow you to claim £6 per week against your taxable income, for such costs.
2. Make sure you are claiming higher rate relief for pensions and donations.
On many occasions we see new clients who are higher tax rate paying individuals failing to claim relief for personal pension contributions, which have come further to the fore due to auto enrolment, and gift aid donations. If you are making such payments, then please consider making a claim for additional tax relief. You can also make a claim for earlier tax years, going back as far as the year to 5 April 2017, if the claim for that year is made by 5 April 2021.
3. Divorcing – don’t fall into the tax trap.
Sadly, many marriages have failed due to the pressures of the COVID-19 pandemic. It is important to take tax advice in relation to any divorce as there can be hidden tax traps that can arise because of transfer of assets between spouses after the tax year of separation. If you have separated in the current tax year to 5 April 2021, then you need to take tax advice ahead of 5 April 2021, to ensure that you don’t fall into the trap.
4. Higher income child benefit charge.
Due to the charge, many people may have stopped receiving their entitlement to child benefit as it only gave them a cashflow advantage. However, if your income has suffered a decrease due to the COVID-19 pandemic then you should consider whether you may be entitled to start to reclaim child benefit.
5. Electric and hybrid cars – time to take advantage?
There are numerous tax breaks for “cleaner” cars such as electrically powered cars and low emission hybrid cars, some of which may be coming to an end, unless extended in the upcoming budget.
The relatively low benefit in kind rates mean that you are not taxed as harshly on the provision of a company car as you would be compared to a “fossil fuel” powered petrol or diesel car.
It may be that you are not convinced of the technology but if you own your own company and your son or daughter are due to pass their driving test in 2021, your company could provide them with a cleaner car. This could be taxed upon you, as the director-shareholder rather than your son or daughter (unless they work for the company) which could be a cheaper route than you financing their first car by taking additional dividends or salary from your company.
6. Tax relief to buy new plant and equipment.
Currently, a business can potentially purchase up to £1m of plant and machinery (not cars or other excluded assets) for its trade and claim the entire amount as a tax-deductible cost in the year of acquisition. Expenditure above £1m is then relieved over several years – either at 18% or 6% per annum depending upon the plant or machinery acquired.
It is expected that the £1m annual investment allowance (AIA) will decrease to £200,000 at the end of 2021. Therefore, the timing of buying machinery is critical as a one-day delay could mean a drop in a tax-deductible cost of £800,000. The AIA calculations do have many complexities and several factors that affect the AIA levels include the year end of the business, associated businesses and the type of asset being acquired. Again, tax advice should be sought well in advance of purchases to ensure that the relief is maximised.
7. Time to look at R&D relief?
With many companies facing cashflow pressures, it may be time to put your modesty aside and consider whether what your company does will qualify for R&D tax relief. Given that there is a possibility of reclaiming tax already paid, any refunds could provide your business with a vital cashflow boost. In addition, if your business is loss making, then those losses can be surrendered to HMRC in return for a cash payment.
8. Early tax relief for anticipated losses
If your company has made profits for say the year to 31 March 2020, the tax will be due on 1 January 2021. However, if there are losses in the current year to 31 March 2021, you may be able to apply for early utilisation of those losses against the 2020 profits, thus avoiding or reducing the tax bill due on 1 January 2021.
Lee added: “There are a myriad of tax savings that could be achieved but most of these depend upon your personal and business circumstances. You should speak to a qualified accountant or tax adviser to see if there any other areas in which tax can be saved.”
Read more articles from our January 2021 tax news below:
- Top Tax Tips for 2021
- Proposed changes to capital gains tax rules
- Employees reminded not to forget working from home and other tax relief
- New year resolutions to save tax
- New VAT rules for construction sector start on 1 March 2021
- £1 million Annual Investment Allowances extended
- Time to review your will?
- Catching up on deferred VAT payments
- SME R&D credit for surrendering losses – the rules are changing!
- Representative occupiers – what next?
Read more below: