Welcome, 2019! As the New Year around rolls, it is always important to explore the steps you can take to keep your tax liability to a legal minimum. Tax-planning can leave you completely lost. By keeping track of a series of tax sections and subsections, keeping well-arranged finances and tax arrangements are daunting tasks and something you definitely cannot avoid.
From health savings account to tax rate schedules and standard deductions, here’s a checklist to review your financial planning to ensure you have organized your affairs in the most efficient tax manner. We hope you find this checklist successful.
1. Tax Planning
Tax planning is a process of forecasting your income’s future. It is about analyzing your marginal income tax rate, also analyzing your income at the end of every fiscal year. Tax Planning is all about saving money and it’s not about taking inappropriate risks in the process, or it is making non-commercial decisions.
Business Tax: Tax planning is a crucial factor in business; you need to have careful timing and proper planning. This will help in maximizing tax relief and minimizing the tax bill received on every transaction. Along with tax benefits, it prevents falling prey to penalties and hefty interest. Dividend taxation, Capital Gains, Accounting dates, Capital Allowances, Research are some of the factors that you need to bear in mind to utilize all the tax reliefs and allowances available before that to minimize the liabilities.
Personal Tax: The amount you can earn before paying Income Tax – increases on 6 April 2019 to £12,500 (from £11,850). This leads to a small reduction in tax of £130 a year for most people. The threshold for paying the Higher Rate of income tax i.e., 40% increases to £50,000 (from £46,350). This amount includes increased Personal Allowance. To maximize your tax efficiency as a company Director and Shareholder, the company should pay £8,632 and dividends of up to £41,368 in the 2019/20 tax year. This assumes that you have no other income. £2,662.50 turns out to be your total personal tax bill. If you take more than this in dividends and salary, then you start to pay tax on the dividends at 32.5%.
Pension is an attractive idea as it offers tax relief along with the highest rate of interest. It is advisable to make a personal contribution to a pension scheme to enjoy long term benefits. Due to the introduction of new pension freedom, you can avail easy access to your pension pot in a hassle-free manner.
Make tax-free pension contributions: It’s always a sure bet that there will be changes to current tax law and 2019 is no different. The pension contributions made to employees by an employer turned out to be tax efficient. You can even claim business tax reduction if you own the company. Keep in mind that the rule changes every year, so it is essential to take advice if it affects you, your family and your employees.
Stakeholder Pensions: The minimum contributions made by employees and employers into the automatic enrolment workplace pension scheme are increased on 6 April 2019. The automatic enrolment policy ensures that a specific portion of the income of all the employees as well as the employers is added into their Pension Scheme. It has stringent government policies. This applies to every employer irrespective of their choice. It doesn’t matter if you set up a pension scheme for automatic enrolment or you decide to use an existing scheme.
Considerable Pension Protection: When an employer becomes insolvent, we have to protect people with a defined benefit pension. During the tax year 2019-20, the lifetime allowance for most people is £1,055,000. This feature applies to the total of all the pensions one receives, this also includes the pension value promised through any defined benefit schemes, but it excludes the State Pension. The rules are complex, but the returns are generous and are worth exploring.
State Pension: From the year 2019, the State Pension age gradually increases for both men and women to reach 66 by October 2020. The majority of working-age benefits are unchanged. Lifetime allowance for pensions increases in line with the Consumer Price Index (CPI), rising to £1,055,000 for 2019-20.
A smart tax saving investment not only saves the investor tax but also earns his/her an excellent return on the investment. The three most effective saving ideas are:
National Pension System: This pension system includes basic pension along with an additional pension, which is income related.
Public Provident Fund: Also known as PPF, PPF promises both tax benefits and decent returns.
Tax-Saving Mutual Funds: Tax-Saving Mutual Funds is equity-based investment scheme offering innumerable benefits.