November 27 2014 Latest news:
Wednesday, January 30, 2013
WHATEVER your views on the merits or otherwise of tax planning, you may well agree it is better to pay less tax (or more) deliberately rather than accidentally. So for some, it may be time to take action.
The top Income Tax rate, currently 50% for annual income over £150,000, reduces to 45% from April 6, 2013. However, the £100,000 limit will remain and those with income over this amount will lose some or all of their personal allowance – effectively paying tax at 60% on some income. Individuals with incomes near these thresholds can save tax by reducing their taxable income in 2012/13 – by deferring income into 2013/14, or bringing forward tax relievable payments.
It may be possible to delay bonus or salary payments from an employer to the 2013/14 tax year. For company owners, choosing to declare a dividend in 2013/14 rather than in 2012/13 will reduce the tax paid on it. It seems clear to me that such timing choices do not constitute “abusive” tax avoidance but there is, of course, an outside chance the Chancellor may announce anti-forestalling rules in the Budget to block the tax savings.
If funds are needed in 2012/13, it is important to remember that capital is not liable to Income Tax. So if you have lent money to the company, ask for it back. An alternative is to take a loan from the company this year and pay it back in 2013/14 when the next dividend is paid – preferably within nine months of the company year-end so there is no tax charge on the company.
Sole traders or those in partnership have less control over when income is taxed. However, they directly control when business investments or tax relievable payments that reduce their profits are made. Maximising pension contributions in 2012/13 so that 50% tax relief is obtained on the payments may be cost-effective – unused parts of the annual £50,000 contributions allowance for the prior three tax years can be brought forward. Conversely, for company owners, it will be more tax-efficient overall for the company to make the contributions.
Unincorporated businesses could also reduce their taxable profits by bringing forward investments in plant and machinery to use up their annual investment allowance (AIA). Although the AIA increased from £25,000 to £250,000 per year from January 1, 2013, complex apportionment rules apply for those who don’t make up their accounts to December 31, so seek advice.
Nor is planning is not just for the better off: these and other straightforward actions can also help families who face the loss of Child Benefit by reducing an individual’s taxable income below the £50,000 threshold.
: : Peter Harrup is tax partner at the Ipswich office of PKF.