Tax planning for the individual farmer

Seamus McCafferty
Seamus McCafferty
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The recent publication of the Finance Act has highlighted many tax planning opportunities for the individual.

The marriage tax allowance is a way for couples to transfer a personal allowance between them. To be eligible the couple must be married or in a civil partnership and both need to be born on or after 6 April 1935.

One of the spouses needs to be a non-taxpayer which means earning less than £11,000 in the current year; £10,600 in 2015-16. The other spouse needs to be a basic 20% rate taxpayer earning less than £43,000 in the current year; £42,385 in 2015-16. Eligible couples can transfer up to 10% of their tax free allowance between them from the 2015-16 tax year onwards. For the tax year 2015-16 this can result in a tax saving up to £212 and for the current tax year, a tax saving up to £220. To apply for the transfer, couples must file a form on HMRC’s website. The marriage tax allowance applies to persons who are employees or self-employment or receiving a pension.

The new personal savings allowance will change the way farmers pay tax on interest received. This new allowance means that basic rate taxpayers can receive up to £1,000 in interest before paying tax on that interest; higher rate taxpayers can receive up to £500 of interest tax free. From 6 April 2016 interest will be paid gross with no 20% tax deducted. A farmer who receives interest above the £500 or £1000 limits will have to pay tax on that interest for the 2016-17 tax year onwards with the first tax payable in January 2018.

From 6 April 2016, the government changed the rules for taxation of dividends. The new rule results in the removal of the dividend tax credit and its replacement with the £5000 dividend nil rate band. The effect of the changes for 2016-17 is that a basic rate taxpayer will now pay tax on dividend income at7.5% whereas previously there was no tax; higher rate and additional taxpayers will now pay tax on dividend income at 32.5% and 38.1% respectively, whereas previously the corresponding rates were 25% and 30.6%. For farmers trading with a limited company, the new dividend regime is going to be more expensive than the previous rules. However in most situations it is still worthwhile for the successful family farm to operate through a company in order to allow the shareholders to avail of the £5000 dividend nil rate band.

As with all taxes personal tax planning requires regular consultation with the farm’s accountant to ensure that the farm business and the owners are availing of all possible tax allowances and that the most appropriate business structure is in place.