Don’t miss the boat - Pre year-end tax planning
With less than a month to the 31st of March and the end of another financial year for a number of businesses, what planning can be done to ensure resultant tax bills are less daunting?
Some key pointers:
1. Annual Investment Allowance
You may have missed the announcement in the autumn budget, but as of 1 January 2013 for 2 years, the Annual Investment Allowance (AIA) for businesses is £250,000 per year – this is up from £25,000 the year prior and £20,000 after this 2 year period.
For businesses with a 31 March 2013 year end – your AIA for this year will be £81,250 rising to £250,000 in the year to March 2014.
So what is it? The AIA allows you to claim a pound for pound allowance against tax in the financial year you bought the asset, subject to the maximum cap – being £81,250 if your year end is March.
So what qualifies? The AIA is available on qualifying plant & machinery, broadly speaking the type of assets that your accountant refers to as capital expenditure.
2. Pension contributions
A not so popular term in recent years, but the pension is making somewhat of a comeback in the popularity stakes. A key benefit of a pension contribution is the tax benefits that they attract for higher rate tax payers.
Tax payers can make gross pension payments equal to the lower of either £50,000 or your current salary.
What’s the benefit? A higher rate tax payer earning £100,000 can “extend” their basic rate tax band by the gross amount of their pension contribution. So a £50,000 contribution in this example will save you £10,000 in tax. This will increase to £20,000 if you make the contribution personally.
Why do it? A pension is no longer merely a long term investment in unknown funds. Today, depending on circumstances, business owners have used their pensions to purchase such things as their commercial property and land. The key benefit of this is that the property/land is no longer taxed on the rental incomes they receive or the capital gain upon selling.
3. Watch your personal allowance
Business owners and high paid employees earning over a £100,000 now suffer a reduction in their personal allowance - £1 of personal allowance for every £2 of income over £100,000.
This won’t affect me? For sole traders and partnerships, the question has to be “are you sure?” Sole traders and partnerships are taxed on the profits the business earns rather than the salary/wage they take. As these profits are chargeable to Income Tax, the £100,000 barrier is often breached and personal allowance reduced without the owner being aware.
4. Tax harvest your assets
The old adage, “use it or lose it” is never more appropriate than at this time of year. There are a number of allowances for which you can maximise in each year. 2 main exemptions to consider:
• Capital Gains Tax exemption of £10,600 per person
• ISA limit of £11,280 (cash ISA is £5,640)
Both should be considered as they provide an efficient method of building up a tax-free nest egg.
5. Be sensible
Tax planning should be that – planning. There are always new schemes coming to the market promising significant tax savings. Whilst some will be valid and beneficial, others will not – so if it sounds too good, it probably is.
All tax planning advice should be considered with a big picture view. For example, a hybrid car may be tax efficient, but if you’re current car is a luxury Mercedes – possibly not the best advice!
The DIY route to tax planning very rarely works. A business should have a team of professional advisors, armed with their particular expertise – Accountants, Financial Advisors, Solicitors and HR to name but a few. Agreed, these services cost money, but the benefits should be clear for all to see.
We hope that you found this round up useful and can use this in your preparations for the end of your financial year. We would be delighted to talk with any business about their preparations for their financial year.
Plan it and Prosper LLP
Independent Financial Advisors
Tel: 0131 654 1983