The COVID-19 pandemic has upended businesses and drastically affected lives and livelihoods. The collapse of markets and the subsequent sluggish recovery of the economy following the partial lifting of in-country and international travel restrictions have made 2020 one of the worst years in modern history. However, despite the struggles, governments still expect households and business to file their taxes on time and accurately.
Everyone knows how much of a headache tax filing can be. However, with good tax planning, it is possible to save on taxes or even defer some payments to a later period. This will help you lessen the tax burden and minimize the strain on your cash flow.
To start off, here are the top 8 year-end tax tips you could use.
Ensure You Claim your Tax Credits
If you are a disabled worker or you have children to look at, you may qualify for tax credits that can reduce the amount of tax you pay. For instance, in the 2020-21 tax year, you can qualify for the maximum child tax credit if your annual income falls below £16,385. The tax credit depends on your income level, the number of children you support and whether or not any of them are disabled.
On the other hand, the working tax credit is designed to help low-income households manage their day-to-day expenses. In the 2020-21 tax year, you can get up to £1,995 in working tax credits plus £1,000 to help you ease the financial effects caused by COVID-19.
Maximize Retirement Savings
One of the best ways to reduce your taxable income is by contributing to your employer’s pension scheme. You can also take advantage of any voluntary contribution opportunities available. Pension deductions are typically made from your gross pay before any taxes are calculated. This means the higher your pension contributions, the lower the taxes you’ll effectively pay.
Besides, the government gives you a tax relief which adds to your savings. For instance, if you earn £30,420 and contribute £4,000 to your pension, the personal tax relief will be around £800. Effectively you’ll be contributing £3,200 (£4000-£800) after the relief.
Take Advantage Of Marriage Allowance
If you are married and one of you earns less than the personal allowance, you can take advantage of the marriage allowance. Previously, it wasn’t possible to transfer personal allowances between partners. However, following a change of law, you can now transfer a personal allowance from a low to a high earning partner.
As an example, assume your income is £11,500 and you are entitled to a personal allowance of £12,500. Effectively you do not pay any taxes. If your high earning partner gets a salary of £20,000 and is entitled to a personal allowance of £12,500, their taxable income will be £7,500. With marriage allowance, you can transfer up £1,250 to your partner leaving you with £250 taxable income while your partner’s taxable income drops to £6,250. This can save both of you up to £200 in tax.
Claim a tax refund
If you are a non-taxpayer or have overpaid taxes through pension or employment, ensure you claim your refund. You have up to 4 years from the end of the tax year in which the refund is due to make your claim. Fill the R40 form and submit it to HMRC. Depending on how busy the HMRC staff are, it can take up to 12 weeks to have your refund processed. To help you bridge any cash flow gap within the waiting period, you can apply for an instant guarantor loan of up to £15,000.
Repay Loan Advances in Time
If you are a director in a company and have been advanced a loan by the company or your personal expenses have been paid via company card, the loan amount will be credited into your director’s loan account. At times this account can become withdrawn which means you owe the company money.
To ensure that you don’t pay the 32.5% corporate tax the HMRC charges on such loan balances, you need to repay up your loan within 9 months following the end of the financial year. In case of a cash flow deficit or for some reason you cannot be approved for a loan due to a poor credit score, you can apply for loans for bad credit no guarantor. Typically, these loans come at a low-interest rate which cannot be compared to the 32.5% tax you’ll otherwise have to pay.
Reinvest your business profit
When your business turns a profit, you have the option to reinvest it or distribute it as dividends. If you invest your profit by purchasing long-lived assets such as machinery vans and computers for your business, you can save on taxes.
Normally, these items qualify for 100% deduction if you are a sole proprietor, partnership or company. For the case of a partnership, the annual investment allowance (AIA) guidelines require that all the partners be individuals or natural personals.
Budget your year-end income and expenses
For cash basis taxpayers, income is considered earned when cash is received and expenses are considered incurred when cash is paid. It is therefore important to project your year-end expenses and assess their impact on your net income.
Making a monthly budget can give you the visibility you need to help you decide whether you are going to push forward your eligible monthly expenses to the following tax year or pay them before the year ends. This can reduce your tax payables.
Beware of tax email scams
It is not uncommon to receive HMRC-related suspicious emails, texts and phone calls during the tax season. As a precaution, ensure you don’t open such emails or worse still click the download links and prompts. Instead, report the incidences to the HMRC.
Some of them could be email banking scams telling you that your refund has been processed and you are to submit account details for funds transfers. Always verify the information sources and to avoid getting scammed.
The tax season is always one of the busiest and can be complicated depending on your tax situation. If you have multiple sources of income or tax credits to calculate and claim, you may need a professional tax advisor to guide you along. Should you end up with a refund, ensure you immediately fill in the appropriate forms and send in your claim so that it can be processed in good time.
While it is recommended that you be monitoring your credit, it so happens that tax refunds may delay, landing you into a temporal cash flow crisis and making you fall behind on some payments. Instead of allowing such circumstances to affect your score, you can apply for loans for bad credit even without the need of a guarantor.