For many people this time of year is when they want to forget all about tax, other than maybe promising themselves that they will submit their tax return earlier next year.
But this is exactly the time of year when you should be taking a step back and thinking about your tax position. Action taken now can mean future tax payments could be significantly smaller than would otherwise be the case.
Tax planning before the tax year ends on 5 April 2013 applies equally to individuals looking at their personal finances and business owners.
Although many planning ideas are simple, others are more complex and require time and consideration before implementation, so it is never too early to start thinking about them.
Tax planning includes making sure you take full advantage of the allowances and exemptions offered by the Government.
1. Married couples* should use both personal allowances and basic rate bands
For the year ending 5 April 2013 all individuals with income of £100,000 or less are entitled to a personal allowance of at least £8,105. Married couples should make use of both spouse’s allowances. If one spouse has not used their allowance but the other has, the couple should consider transferring income-earning assets to the spouse with the lower income.
The same idea applies to the basic rate band, which for the year ending 5 April 2013 is £34,370. So again make sure that, where possible, both spouse’s basic rate bands are used before either spouse starts paying tax at the higher rate of 40%.
Clearly there are other issues to consider, not least anti-avoidance legislation, but this type of planning is absolutely legitimate and over several years can save a married couple a significant amount of tax.
2. If your taxable income is over £100,000 minimise your exposure to the 50% tax rate and loss of personal allowance
If your income is between £100,000 and £116,210 your effective tax rate might be as high as 60% because of the restriction in your personal allowance.
Planning could include:
• Reducing your taxable income by making pension contributions or gift aid payments to charity.
• Defer income such as dividends from 2012/13 to 2013/14 or accelerate expenditure such as buying capital equipment from 2013/14 to 2012/13 (but see below regarding to change in the rate of the annual investment allowance). You need to consider the impact on future tax bills and be aware of the anti-avoidance legislation.
• When looking at investments, think about maximising capital growth which will be taxed at the maximum CGT rate of 28%.
3. Sole traders and partners should use maximise the Annual Investment Allowance
An Annual Investment Allowance of 100% of the first £25,000 of expenditure on plant and machinery (excluding cars) is available until 31 December 2012 (31 December 2012 for companies). This increased to £250,000 from 1 January 2013. All businesses should, where possible, plan capital expenditure to ensure the maximum benefit is obtained from this allowance and may wish to delay acquisition to obtain the higher relief going forward.
Where you have an accounting date that spans the date of the change you need to be careful because the pro-rating of the allowance can be tricky.
4. Plan for your retirement
In the last few years there have been many changes made to pension tax relief and more changes were made from 6 April 2012. You should speak to us or your financial adviser to ensure you understand the changes and maximise your benefits.
Some of the key changes are:
- In April 2011 the maximum annual pension contribution (annual allowance) reduced to £50,000, although generally any unused allowance from one year can be carried forward for three years. This means that any unused allowance for 2009/10 will not be able to be used beyond 5 April 2013. The annual limit is due to be reduced to £40,000 from 6 April 2014, making it more important than previously not to miss out now.
- As the top rate of tax is reducing with effect from 6 April 2013 from 50% to 45% then this may give you the opportunity to consider accelerating or making additional payments now.
- From April 2012 the lifetime allowance reduced from £1.8 million to £1.5 million and will reduce to £1.25m from April 2014. HM Revenue & Customs have announced that it is possible to remain exempt from this reduction in the Lifetime Allowance and still benefit from the £1.5m limit in the future. An individual can remain exempt if they adopt what is known as “Fixed Protection”. To apply for Fixed Protection and ensure that the Lifetime Allowance stays at £1.5m, an individual must complete a form and submit it to HMRC by 5 April 2013.
- State pension age is increasing, so you need to consider if/how this affects your retirement planning
5. Consider investing in Venture Capital Trusts or Enterprise Investment Schemes
Venture Capital Trusts (VCTs) are a method of reducing an individual’s tax liability. The individual subscribes for ordinary shares in a VCT and obtains tax relief at a rate of 30% up to a maximum annual investment of £200,000. Furthermore, as long as the shares are held for at least five years, then the disposal will be exempt from capital gains tax. If the shares are sold within five years then the income tax relief is clawed back and the shares are chargeable to capital gains tax. Dividends on shares held within the VCT are also exempt from income tax. You do need to bear in mind though this would be an investment into a company and as a result there is an investment risk to weigh up against the possible tax savings.
Investments in Enterprise Investment Schemes (EIS) are similar to VCTs except that the investment is shares in a single qualifying unquoted trading company. Individuals obtain tax relief at a rate of 30% up to a maximum investment of £1,000,000 (or the tax liability of the year if lower). In order to be exempt from capital gains tax, the shares must be held for at least three years, otherwise the disposal will be chargeable and the income tax relief will be clawed back. Again, the investment is into a company, and there is an investment risk to weigh up.
6. Use your CGT annual allowance
For the year ending on 5 April 2013 all individuals have a CGT annual exemption of £10,600 so you should try and use it, if possible.
7. Consider Entrepreneurs’ Relief
If you are likely to sell a business interest or business asset in the next 12 – 24 months you should speak to your tax adviser to ensure that you qualify for Entrepreneurs’ Relief. This relief can save you up to £1.8 million of tax but the rules are stringent so they must be considered well in advance of a sale.
8. Make tax free investments
• Consider utilising your annual ISA allowance, which is £11,280 for 2012/13.
• If you have a child under 18 who does not have a child trust fund you could invest up to £3,600 in a new Junior ISA.
9. Make use of your Inheritance Tax exemptions
Take advantage of the annual gift exemption of £3,000 where possible. If you have not made use of the exemption in one year, it can be carried forward and used the next year. The exemption can be offset against a larger gift, or used to cover several smaller gifts. Certain other small gifts, some gifts on the occasion of marriage and gifts to charitable and political organisations are also exempt.
10. Child benefit
Child benefit will be restricted where one individual in a household has an income over £50,000. Where possible, income should be equalised between husband and wife and ‘partners’ to ensure that the child benefit restriction is minimised.
* references to married couples and spouses applies equally to civil partnerships and civil partners.