Saving tax ahead of the year end
There is a range of tax planning opportunities to consider ahead of the tax year end, some of which expire on 5 April 2013. Here we consider some key strategies to help you minimise your tax liability, whilst looking ahead to the raft of tax and business changes set to take effect in 2013/14.
Personal allowances: are you making the most of them?
The tax-free personal allowance (PA) for 2012/13 is £8,105 for those aged under 65. Meanwhile, the PA for those aged 65 to 74 at 5 April 2013 is £10,500, and for those aged 75 or over it increases to £10,660. Both higher allowances are scaled back if income exceeds £25,400.
If your spouse or partner has little or no income, consider transferring income (or income-producing assets) to them to make full use of their personal allowance. However, care should be taken to avoid falling foul of the settlements legislation governing 'income shifting', and any gifts of capital should be unfettered. Please contact us before taking action as we will need to consider the wider implications for you and your family.
You may also want to invest in tax-free savings options such as ISAs and some National Savings products in order to keep your income below the level at which the age reduction allowance is scaled back.
As announced in the Autumn Statement, the tax-free personal allowance for 2013/14 will rise to £9,440. This is higher than the increase originally planned at the 2012 Budget, when it was announced that the personal allowance would be raised to £9,205. The basic rate limit for income tax will be adjusted so that the higher rate threshold above which individuals pay income tax at 40% increases by 1% in 2014/15 and in 2015/16. For 2013/14, the higher rate threshold will be £32,010, decreasing from the current £34,370.
Planning for a 45% top tax rate
From 6 April 2013 the additional rate of income tax, which is levied on those with incomes over £150,000, is set to fall from 50% to 45%. Consequently, the dividend additional tax rate will be reduced in line with this from 42.5% to 37.5% and trust rates will mirror these changes. If you are likely to be subject to the 50% tax rate in 2012/13, you might want to consider deferring your income into the following tax year, for example by delaying dividend payments. This could mean that you would benefit from paying income tax at the lower dividend rate of 37.5%. The result would be that for every £90 of dividend subject to the additional rate, you would pay additional tax of £27.50 rather than £32.50.
Conversely, maximising pension contributions (within certain limits) before 5 April 2013 will allow you to obtain relief at the higher rate of 50% - please see overleaf for further information.
Giving careful consideration to the timing and structure of your income could significantly reduce your tax bill. Please contact us for further advice.
While the 50% rate may be falling, it is always advisable to review tax rates across the family to ensure that you are making the most of tax-free opportunities and keeping marginal tax rates as low as possible. For example, it is costly for one spouse or civil partner to be paying tax at 40% or even 45% while the other pays tax at only 20%. Talk to us for strategies tailored to your individual circumstances.
Are you saving tax-efficiently?
Despite continuing low interest rates, ISAs are still a popular tax-free saving option.
For all adult savers the maximum investment in 2012/13 is £11,280, of which no more than £5,640 can go into a cash ISA. 16-17 year olds can invest up to £5,640 only in a cash ISA. You have until 5 April 2013 to make your 2012/13 ISA investment. In addition, Junior ISAs, for those aged under 18 who do not have a Child Trust Fund account, allow investment of up to £3,600 in 2012/13.
The overall annual contribution limit for ISAs is set to rise from ?11,280 in 2012/13 to £11,520 in 2013/14. Of this, the cash limit will increase from £5,640 to £5,760.
The Junior ISA subscription limit and the Child Trust Fund annual subscription limit will also increase, climbing from £3,600 to £3,720 in 2013/14.
Pension planning is key
Investing in a company or personal pension scheme will afford tax breaks on your retirement savings. For 'additional rate' taxpayers, maximising pension contributions during 2012/13 will allow you to obtain relief at the rate of 50% (or in some cases over 60%). From April 2013 the rate will reduce to 45%.
For pension contributions to be applied against 2012/13 income they must be paid before 6 April 2013. Tax relief is available on contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but subject also to the annual allowance of £50,000. Note that unused allowances may be carried forward for up to three years - please talk to us about maximising your pension savings and tax relief.
The 2012 Autumn Statement contained controversial proposals to restrict pensions tax relief. The maximum annual amount that you can contribute (and still receive tax relief) is going down from £50,000 to £40,000, although this change will not take effect until 2014/15.
In addition, the lifetime allowance will be lowered from £1.5 million to £1.25 million with effect from 6 April 2014. Please talk to us if you are affected by the changes.
Inheritance tax - lifetime planning for big tax savings
Inheritance tax (IHT) is currently payable at 40% on total assets exceeding £325,000 at death. However, with careful planning and by utilising the available allowances, it may be possible to reduce your liability to IHT.
Where possible, make sure you utilise the annual IHT exemption for gifts before 6 April. This is £250 per recipient, per year, plus up to £3,000 to cover larger gifts (any unused amount may be carried forward to enhance the following year's exemption). Gifts covered by the exemption do not form part of the estate for IHT purposes.
Your IHT planning strategies may also include maximising reliefs, utilising exempt transfers and making the most of trusts. Please contact us to discuss a programme for tax-efficient lifetime gifts.
The IHT threshold, officially known as the nil-rate band, has been frozen at £325,000 until 2015. However, in the 2012 Autumn Statement it was announced that the nil-rate band will rise by 1% in 2015/16 to £329,000.
Timing your expenditure
With the main rate of corporation tax and top rate of income tax set to fall over the coming years, delaying expenditure to save money or aid cash flow might not be the most tax-efficient approach.
By incurring expenses shortly before the year end rather than after, relief may be obtained 12 months earlier and at a higher rate. In the same way, the disposal of an asset may trigger an earlier claim for relief or even, in the event an asset is sold at more than its written down value, a charge to tax.
The main rate of corporation tax will be reduced from 24% to 23% for the financial year beginning 1 April 2013.
Furthermore, the Chancellor announced in the Autumn Statement that from 1 April 2014 the main rate of corporation tax would be lowered to 21%. This was a greater reduction than previously announced in the 2012 Budget, which intended a rate of 22% from 1 April 2014.
The Autumn Statement also introduced a temporary increase in the annual investment allowance from £25,000 to £250,000. This means that the majority of businesses can now claim a year-one write off for expenditure on most types of plant and machinery (excluding cars) of up to £250,000 per annum for a limited two year period commencing from 1 January 2013. We can advise on capital allowances to help maximise tax relief.
The rules are complicated so please contact us for advice about optimising the timing of your expenditure, ahead of the year end.
Time to review your business motoring?
The high cost of fuel and the challenging economic climate mean that now may be the ideal time to review your business motoring strategies. The right decision could save a considerable amount of tax.
You might want to consider switching to a 'green' company car with low CO2 emissions. This may reduce your tax liability as such vehicles are taxed at a lower percentage rate. For cars which do not produce CO2 engine emissions under any circumstances when driven ('zero emission cars', including those powered solely by electricity), the emissions-based percentage reduces to zero thereby reducing the car benefit charge to nil.
However, if cash is short and you cannot or do not want to commit business funds to replace company cars, it may be worth reviewing the company car policy completely. It could prove more beneficial to pay employees for business mileage in their own vehicles, at the statutory mileage rates, with a rule of thumb being that this option is more likely to pay off when business mileage is high. We can help you make the right decision for your business - please contact us for assistance.
From 2013/14, the car fuel benefit charge multiplier will rise from £20,200 to £21,100 and the van fuel benefit charge will rise from £550 to £564.
Meanwhile, the 100% first-year allowance (FYA) for expenditure incurred on cars with low CO2 emissions and electrically propelled cars that is due to end on 31 March 2013, will be extended for an additional two years to 31 March 2015.
The CO2 emission thresholds which determine the rate at which capital allowances are given, and at which lease rentals will be restricted, will also be revalorised.
We can help! For further information on year end tax planning strategies, or for advice on any of the other issues raised in this guide, please contact us. We will be delighted to assist you.