Tax Saving Tips You Need to Know | Films4U
Five tips on how to make tax savings
Where do you start if you want to make tax savings? With so many options available, it can all seem a little overwhelming. In this short guide, we’ll give you a solid platform from which to begin.
This guide will provide information about legal methods designed to help you benefit from tax savings – whether you’re an investor or someone more generally looking for ways to make tax savings.
1. Pay into a pension scheme
Most people in the UK have a pension. For example, employees are now auto-enrolled into pension schemes. Whether you work for someone else – or are self-employed – it’s important to get the best contribution from your pension if you want to make tax savings.
If you pay into a scheme, you’ll enjoy a certain level of tax relief on your contributions. This figure will be based on your Income Tax rate. How do you get this relief? It depends on what type of pension/s you have.
How much tax do I pay on my pension?
If you pay tax in the UK between 2020-2021, you’ll get relief on any amount up to the value of your annual salary or £40,000 (whichever is the least). If you add any more to your pension (for example if you add some money from your savings) then you will be taxed on the additional contribution.
Your lifetime allowance is £1,073,100 as of today, but this figure could be subject to change by HMRC at a later date.
2. Check your tax code
Before you do anything else, check your tax code. If yours is wrong, it could mean you’ve been overpaying and are due a refund. Your code comprises a unique series of numbers and letters that tell HMRC how much you can earn before paying Income Tax.
From 2020-2021, the majority of people in the UK will have the following code: 1250L. As part of your tax savings strategy, check your paperwork now. Provided you have just one job or a pension, you should fall into the ‘1250L’ category.
What does the 1250L tax code mean? It denotes a taxpayer who is under 65 with an income of less than £100,000. Such an individual is allowed £12,500 in Personal Allowance before they have to pay Income Tax on their salary.
To avoid missing out on tax savings, check your tax code each year. Otherwise, you could be paying too much to HMRC. If you have overpaid on tax, you can reclaim the money owed by writing to HMRC.
Make sure you include copies (don’t send the originals) of your P45 and P60. Provide clear evidence when writing as to why you feel a refund is due.
3. Pay into an ISA
Not familiar with ISAs? ISA is shorthand for ‘Individual Savings Account.’ It lets people enjoy tax savings by paying money into an investment or cash savings account. Such accounts can be set up with a building society, bank, an asset manager, or an insurance company. There are different types of ISAs and it’s important to understand the benefits of each if you want to make tax savings.
Four types of ISA are as follows:
- Cash ISA. This functions like a normal savings account. The main difference is that you can only deposit a limited amount of cash each year. The upside is that you don’t pay tax on any interest you earn. There are different types of cash ISA, so speak to an expert about your tax savings strategy first.
- Stocks and shares ISA. This an investment account where you don’t have to pay tax on capital gains or earned income. However, it is a little riskier than a Cash ISA because your money will follow the value of stocks and shares – so it can go up or down. From now until 2021, you can pay as much as £20,000 into a stocks and shares ISA.
- Innovative finance ISAs. This is sometimes referred to as an Ifisa. It works by linking investors to borrowers who might otherwise struggle to get a conventional bank loan. These people could be business owners, or individuals working as property investors. The borrower offers a higher interest rate but there’s no guarantee of a return.
- Lifetime ISA. This is a government-backed scheme created to support first-time buyers (it replaces the Help to Buy ISA that was cancelled in 2019) or people saving for retirement. You must be over 18 but under 40 to open a Lifetime ISA, and you can put in up to £4000 a year until you’re 50 years old. In terms of tax savings, the government will add a 25% bonus to your savings each year, up to a maximum of £1000 annually. There are a variety of options when it comes to this ISA; you can decide whether you want to hold cash, stocks and shares, or a combination of both. Bear in mind that you don’t want to withdraw money once you start saving or you’ll be charged a 20% withdrawal fee. You can withdraw your money without a fee if you are buying your first home, turning 60 years old, or you are terminally ill with less than a year to live.
Not sure which ISA is right for you? It’s always best to seek advice from a professional before investing in a scheme. Make sure your advisor is registered with the Financial Conduct Authority (FCA) first.
4. Capital Gains Tax
If you want to enjoy tax savings, it’s important to understand Capital Gains Tax (CGT). This is a levy paid on money earned by selling any property other than your home, and also applies to some other investments.
You won’t always have to pay Capital Gains Tax. The allowance for 2020-2021 is £12,300, after which you will be charged in line with your tax code.
The rates are as follows:
- 10% for basic rate (20%) taxpayers and 18% for residential properties other than your main property
- 20% for higher rate (40-45%) taxpayers and 28% for residential properties other than your main property
To pay less tax on CGT, look at some of the other topics covered in this article, like ISAs, pensions, and government-backed rollouts like the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) which are also ideal for film investors and film financiers.
5. Invest in tax savings (EIS, SEIS)
If you are a film investor (or investor in general) and want to make tax savings, the Seed Enterprise Scheme (SEIS) and Enterprise Investment Schemes (EIS) deserve a closer look. Both are government-backed initiatives designed to encourage private investors to help new ‘higher risk’ companies by giving them tax breaks.
How are SEIS and EIS different?
These two schemes are very similar but there are a few key differences to bear in mind from a tax savings point of view.
The focus of this scheme is on businesses in their early stage of development (typically these companies will have been trading less than seven years). You can invest as much as £100,000 each year and will benefit from a tax break of 50%. You will also enjoy exemption from Capital Gains Tax for any profits your shares make, provided you sell them after three years and no earlier.
The EIS scheme is another option for film financiers – and investors in general – keen to make tax savings. The emphasis, in this case, is on medium-sized businesses (also known as SMEs). Here, you can invest up to £1 million each tax year and enjoy a 30% tax break in return. In line with the SEIS scheme, no Capital Gains Tax is payable on any shares sold after three years.
What companies qualify for SEIS & EIS investment?
Not all businesses are eligible. For example, banking, insurance, commodity, and land are trades excluded from these schemes. Inevitably, there will be grey areas and so it’s important to do your research.
The film industry is eligible for SEIS and EIS investment and is currently booming, due to the increased use of streaming services provided by well-known brand names like Netflix and Amazon Prime.
If you want to make decent tax savings, be aware that businesses only qualify for funding if they can prove the money will be used for growth and development purposes (such as marketing, hiring new staff, or developing/improving new products).
Enjoy tax savings with Films4U
As touched upon earlier, the film industry is still alive and kicking – despite the uncertain economic landscape created by COVID-19 and Brexit. We work with some of the biggest names in the industry and have a strong track record of success (have a look at some of the returns investors have enjoyed with Film4U so far).
With over 100 years of combined experience, we promise to give your film distribution and help you enjoy tax savings via the government-based schemes mentioned earlier in this article. Contact us to learn more or use our online form to apply