Planning now can save tax later

PETER HARRUP of PKF offers some tax-saving tips ahead of the introduction of a 50% Income Tax band and other changes in the taxation regime

PETER HARRUP of PKF offers some tax-saving tips ahead of the introduction of a 50% Income Tax band and other changes in the taxation regime

THE imminent arrival of a 50% Income Tax rate, the potential loss of the personal allowance, increases in National Insurance contributions (NIC) and a potentially penal clawback of higher rate tax relief on large pension contributions will be exercising the minds of many business owners.

Although we may see a rash of new products emerge in the tax avoidance market and the recycling of older ideas, the best answer in some instances may be to do nothing at all.

For example, if you intend to sell your company in the short to medium term, improving the balance sheet and increasing the value of the company's shares could see those profits eventually realised via a share sale at Capital Gains Tax (CGT) rates - currently a much more attractive option.

Even where a sale may still be some way off, many may prefer to defer drawing down extra income, at the expense of a Corporation Tax cost (cheaper than the potential Income Tax and NIC on extraction), in the hope that the tax and NIC increases prove to be short-lived.

Over time, the sting in the tail could be that rolled up accumulated profits neither invested in nor required to run the business, may endanger entitlement to entrepreneur's relief and the 10% rate of tax on the first �1million of lifetime capital gains. They could also affect entitlement to business property relief from Inheritance Tax. Yet, even in this worst case scenario, a current top rate of CGT of 18% on a share sale looks more attractive than the Income Tax equivalent.

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Bringing forward income to the current tax year may give a limited relief from next year's tax rise but is not without its own problems. For example, advancing a bonus may be feasible but an advance of normal salary may, without proper planning, turn out to be an ineffective loan arrangement. This will advance payment of Income Tax and NICs so cash flow should also be considered.

Net of tax and NIC bonus payments, whether or not brought forward, can be left as a loan to the company enabling NIC-free interest to be paid at commercial rates. This is not only NIC-efficient, although there is no equivalent Income Tax saving, but can help ease pressure where cash flow may be tight and the eventual repayment of the loan can be made tax-free.

Many companies will be paying dividends before the tax year ends on April 5. If cash is not available for the whole dividend due, then it is very important that all procedures and paperwork are dealt with correctly, as otherwise some or all of the dividend may prove to be taxable next year.

The new Income Tax regime can hardly be described as voluntary and some anti-forestalling measures are already with us. Yet in many instances, with careful, sensible planning, there is no reason why its impact cannot be reduced and perhaps avoided altogether.