News
January 2010
Act Now To Save On Tax
With money tight for many individuals and businesses, and tax rises on the horizon over the coming years, it makes sense to start planning now for the end of the financial year, to ensure no-one is paying any more tax than necessary.
The 2010/11 tax year will see the introduction of the first of the major tax increases introduced by the government as it battles to reduce the budget deficit, with a new 50% tax rate on income over £150,000.
Furthermore, additional restrictions on personal allowances introduced in the 2009 Budget mean there is a small income band where the effective tax rate is 60%. Those earning over £100,000 are set to gradually lose their personal allowances on a sliding scale, at a rate of £1 for every £2 of extra income, and anyone earning above £112,950 will no longer receive any personal allowance at all. For those earning between £100,000 and £112,950, the restriction results in an effective tax rate of 60%.
Since this income band is relatively narrow, it may make sense for individuals to adjust their income below £100,000, in order to keep hold of their personal allowance and reduce their tax liability. This could be done through making extra pension contributions or charitable donations, which would themselves attract tax relief, boosting the value of the contributions.
Anyone in a marriage or civil partnership, where one partner has a much lower level of income than the other, may also wish to consider transferring income-producing assets to the lower earner, in order to reduce their overall tax bill.
Those with earnings above £150,000 also face the tax relief on their pension contributions being restricted to the basic rate (20%) from 2011, but ‘anti-forestalling’ measures have been brought in to prevent anyone with income above £130,000 making unusually large contributions during the 2009/10 and 2010/11 tax years in order to get around the new rules. The rules surrounding this are extremely complex, so please contact us if you need advice in this area.
Individuals should also consider whether they have used all of their ISA allowance of £7,200 in the 2009/10 tax year (£10,200 for the over-50s), their capital gains tax personal exemption of £10,100 and the limit on gifts which are exempt from inheritance tax of £3,000 per annum.
Business owners should also look to maximise their use of Capital Allowances, which allow them to deduct the cost of certain purchases or investments – such as plant, machinery, fixtures and fittings – from their taxable profits, and reduce their tax bill.
Most businesses have an Annual Investment Allowance (AIA) of £50,000 for plant and machinery and, provided they stick to that limit, can write off 100 per cent of the cost of qualifying plant and machinery. Any business which has not used their allowance could look at whether any planned spending can be brought forward. Certain items of equipment also qualify for special rate allowances, at 10 per cent per year, including integral systems (such as electrical systems, water systems and lifts), insulation and equipment with a planned life of over 25 years.
It may also be possible to bring forward revenue expenditure in order to reduce profits or increase losses for carry back, while businesses which are holding stock which has now reduced in value could look to revalue it for the same reason.
For more advice or information, please contact us.
