With the end of the tax year fast approaching, now is a good time to review your business and personal finances to ensure that they are as tax-efficient as possible. In this guide we consider some of the planning options available before April 6, whilst also looking ahead to some of the business and tax changes planned for 2012/13.
Don’t waste personal allowances
The “tax-free” personal allowance (PA) for 2011/12 is £7,475, so you should consider taking steps now to ensure that it is fully utilised.
If your spouse or partner has little or no income, consider transferring income to them to ensure that personal allowances are being utilised. Similarly, it is costly for one spouse or civil partner to be paying tax at 40 per cent or even 50 per cent while the other pays tax at only 20 per cent. Equalising income where possible ensures that you will both pay tax at the lowest possible rate, thereby reducing the overall combined tax bill.
The PA is gradually withdrawn where adjusted net income exceeds £100,000 (being reduced by £1 for every £2 of income over £100,000) and is lost completely once income reaches £114,950, which means a 60 per cent effective tax rate for income between these amounts. Consider reducing income to below £100,000, for example by making pension contributions, donating to charity or transferring income producing assets to a spouse or civil partner. Other strategies can include delaying bonus or dividend payments.
Looking ahead: personal allowances
The PA for those aged under 65 increases to £8,105 from 6 April 2012. However, the advantage to higher rate taxpayers will be countered by a lowering of the higher rate threshold, to £34,370.
In addition, the PA for those aged 65 to 74 will rise from £9,940 to £10,500 for 2012/13, while the PA for individuals aged 75 and over will increase from £10,090 to £10,660.
Review your capital expenditure
The majority of businesses are able to claim a 100 per cent Annual Investment Allowance (AIA) on the first £100,000 of expenditure on most types of plant and machinery (except cars). This is quite a high ceiling but it is worth considering if your business is incurring substantial qualifying expenditure: spreading the cost over two years may maximise tax relief (see Looking Ahead below).
In addition to the AIA, there are specific 100 per cent allowances available for some investments, including energy-saving equipment and low-emissions cars – please contact us for details.
In general, a purchase made just before the end of the current accounting year will mean the allowances will usually be available a year earlier than if the purchase was made just after the year end. In the same way, the disposal of an asset may trigger an earlier claim for relief or even an additional charge to tax.
Looking ahead: capital allowances
From April, 2012, there will be a reduction in the amount of expenditure on plant and machinery which qualifies for a 100 per cent year one write-off (via the AIA), from £100,000 to just £25,000.
In addition, for chargeable periods ending on or after April 1 (for businesses within the charge to corporation tax) and on or after April 6 (for businesses within the charge to income tax), the rates of writing down allowances will be reduced from 20 per cent to 18 per cent (main rate pool) and from 10 per cent to 8 per cent (special rate pool).
Note that for businesses with years straddling March 31/ April 5, there will be a transitional AIA and writing down allowance.
Enterprise Zones: As announced in the Autumn Statement, the Enterprise Zones in assisted areas will qualify for enhanced capital allowances. These allowances will be available from April 1, 2012, to March 31, 2017.
Consider tax-efficient savings & investments
ISAs: You have until April 5, 2012 to make your 2011/12 ISA investment. For all adult savers the maximum investment in 2011/12 is £10,680, of which up to £5,340 can be invested in cash. 16-17 year olds can invest up to £5,340 only in a cash ISA.
The new junior ISA, for under 18s who do not have a Child Trust Fund account, allows investment of up to £3,600 in 2011/12.
The Enterprise Investment Scheme (EIS) allows income tax relief at 30 per cent on new equity investment (in qualifying unquoted trading companies) of up to £500,000 per tax year. Capital gains tax (CGT) exemption is also given on qualifying shares held for at least three years.
With Venture Capital Trusts (VCTs), individuals investing up to £200,000 a year in VCTs will be exempt from tax on resulting dividends and on capital gains when they dispose of shares. Individuals who subscribe for new ordinary shares in VCTs will, in addition, be entitled to income tax relief at 30 per cent on up to £200,000 in any tax year, provided the shares are held for at least five years.
Looking ahead: savings and investments
ISAs: The maximum investment limit for an adult ISA will rise to £11,280 from April 6, 2012. Up to £5,640 can be invested in a cash ISA. The Junior ISA subscription limit will remain at £3,600.
EIS & VCTs: As announced in the Autumn Statement, the EIS will be simplified by relaxing the connected person rules and the definition of shares that qualify for relief, and a new qualifying test will be introduced. The Government will also remove the £1m investment limit per company for VCTs to help reduce the administrative burdens associated with the scheme.
From April 6, 2012, the employee limit for both EIS and VCT purposes will be increased to fewer than 250 employees, while the gross asset limit will rise to £15m before the investment and £16m after. In addition, the maximum annual amount that can be invested in a company will increase to £10m and the maximum annual amount that an individual can invest under the EIS will rise to £1m.
SEIS: From April, 2012, a new Seed Enterprise Investment Scheme will aim to encourage investment in start-up companies. The SEIS provides income tax relief of up to 50 per cent for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and a cumulative investment limit for companies of £150,000. The scheme also offers a capital gains tax ‘holiday’ for investments made.
Make pension contributions
Investing in a pension scheme, whether a company or a personal scheme, allows you to enjoy tax breaks on your pension savings. There are tax reliefs as you invest and a tax-free regime for your savings. Your employer may also be able to contribute and obtain tax relief.
For pension contributions to be applied against 2011/12 income they must be paid by April 5, 2012. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but subject also to the annual allowance. Pension contributions can be made at up to 100 per cent of relevant earnings, subject to the annual allowance of £50,000. Unused allowances (up to £50,000 per year) may be carried forward for up to three years. Unused allowances from 2008/09 will be lost unless used by April 5, 2012.
Looking ahead: pensions
The lifetime allowance on money that can be accrued in a pension fund and still receive tax relief, is set to fall from £1.8m to £1.5m from April, 2012.
Meanwhile, starting from October 2012, employers will have to enrol all eligible workers into a qualifying pension scheme. Auto-enrolment is being phased in from October 2012, on a staged basis. In the 2011 Autumn Statement, the starting deadline for employers with fewer than 50 workers was deferred until the start of the next Parliament.
z Rennie Welch’s tax department can provide support in all aspects of tax compliance and planning. If you require further information please telephone us on 01573 224391 or email email@example.com.