Tax-saving opportunities:
Time to take advantage
Tax planning should be a year-round process, but since some opportunities expire at the tax year end, 5th April is a key date.
Here are just some of the strategies you might wish to consider before 5th April every year. Remember, the sooner you discuss your circumstances with us, the sooner we can act, and the greater the opportunity to save money.
Claim Capital Allowances
Capital allowances are the tax deduction your business obtains for depreciation and losses on disposal of your assets – usually cars, plant, machinery and equipment used in the business. The end of the tax year on 5th April and the end of your accounting year will govern when tax relief can be claimed. A purchase just before the end of the current accounting year will usually mean the allowances are available a year earlier than would have been the case, had the purchase been just after the year-end. Where applicable, the disposal of an asset just before the year-end will accelerate a deduction (balancing allowance), whereas a disposal just after the year-end will defer a balancing charge (an addition to profit). Care needs to be taken – the date expenditure is incurred is critical to the timing of tax relief. Ask us for details of the rates of allowances available to your business.
Extracting Profit
The question of whether it is better to take a salary/bonus or a dividend is still one that needs careful consideration and advice. A dividend is paid free of NICs, which would typically cost 13.8% or even up to 23.8% in combined employer and employee contributions. The effect can be a considerable saving but there can also be an increase in the value of the shares of your company if valuation is ever necessary (e.g. for inheritance tax). 5th April is your last date for paying a 2008/09 dividend, and higher rate tax on that dividend will not be due until 31st January 2010. Talk to us now about this and other ways to extract profits from your business tax-efficiently.
Tax-free savings
Gains and most income in Individual Savings Accounts (ISAs) are tax-free, and they are ideal for saving small regular amounts. With a limit of £7,200 on annual savings, this mounts up surprisingly rapidly.
Shorthand notes on simple tax planning
Inheritance Tax
- Annual exemption - Gifts of £3,000 per year can be made free from Inheritance Tax (IHT). An unused exemption can be carried forward one year so that a total of £6,000 could be gifted. For a husband and wife this could total £12,000.
- Children got married then a gift of £5,000 per parent can be made in year of marriage.
- Grand children got married, then a gift of £2,500 per grandparent can be made in year of marriage.
- Consider utilising the use of the annual IHT nil band. This changes yearly. For instance, 2008/9 = £312,000. Do this either by making gifts as above or inserting appropriate clause in your will.
Investments
- Invest in an ISA before 5 April and take advantage of the tax-free savings it allows.
- Consider transferring income-generating assets between spouses/partners to the person with the lowest income.
- Look at tax-free investments offered from National Savings.
- Consider VCTs and EISs as tax efficient investments
Pensions
- Higher rate taxpayers making payments to their pension could attract tax relief at their highest rate.
- Pay into Family pension - under stakeholder pension rules you can pay into a pension scheme for your children. A payment of £2,880 in 2008/9 would have become £3,600 with the government's contribution and the growth is tax-free. These amounts increase annually.
- Premiums can go into ‘cash funds’ if you are risk averse (and who could blame you!).
Capital Gains Tax
- Consider transferring assets between husband and wife, civil partners, before sale to utilise annual capital gains exemption.
- If you are married or in a civil partnership consider one spouse selling shares to maximise annual exemption and then the other immediately buys the same number of shares.
- Sell shares and then buy back with an ISA to utilise the annual exemption.
