Year End Tax Planning
Wednesday, March 13th, 2013
It is easy to ignore awkward issues involving tax. Don’t – it could cost you dear.
Instead, think of a regular review of your tax affairs (at least once a year) as an opportunity to reduce the tax man’s take from your family. The period leading up to the end of the tax year on 5th April is one of the best times to review your taxes and finances.
Tax saving tips for the family
Each spouse is taxed separately, and so it is an important element of the basic income tax planning that maximum use is made of personal reliefs and the starting and basic tax rate bands.
If you are self-employed or run a family company, consider employing your spouse or taking them into partnership as a way of redistributing income.
This could be just as relevant for a property investment business producing rental income as for a trade or profession.
If you are in receipt of Child Benefit and either of you or your live in partner (widely defined) have income above £50,000 then it is possible that you may have to pay back some or all of the benefit through a new tax charge that applies from 7 January 2013.
This could be achieved by reducing income for this purpose. Examples include making additional pension contributions or charitable donations or reviewing how profits are shared and extracted from the family business.
Those aged 65 and over
Taxpayers aged at least 65 should consider how to make full use of the available age allowances. The higher allowances are gradually withdrawn once income exceeds £25,400. Consider switching to non-taxable or capital growth oriented investments to avoid losing out on allowances.
Children have their own allowances and tax bands. Therefore it may be possible for tax savings to be achieved by the transfer of income producing assets to a child.
Generally this is ineffective if the source of the asset is a parent and the child is under 18. In this case the income remains taxable on the parent unless the income arising amounts to no more than £100 gross per annum.
National insurance matters
If a spouse is employed by the family business it is probably worth paying earnings in 2012/13 of between £107 (the employee lower earnings limit) and £144 (the employer threshold) per week.
There will then be no employer or employee contributions due on the earnings but entitlement to a state retirement pension and certain other state benefits is preserved.
Giving to charity
Charitable donations made under the Gift Aid scheme can result in significant benefit for both the donor and the charity. Currently the charity is able to claim back 20% basic rate tax on any donations and if the donor is a higher rate taxpayer the gift will qualify for 40% tax relief.
Therefore a cash gift of £80 will generate a tax refund of £20 for the charity so that it ends up with £100. The donor will get higher rate tax relief of £20 so that the net cost of the gift is only £60.
Always remember to keep a record of any gifts you make.
Capital gains tax
The first £10,600 of gains made in 2012/13 are CGT free being covered by the annual exemption. Each spouse has their own annual exemption, as indeed do children.
A transfer of assets between spouses may enable them to utilise their annual exemptions. Consider selling assets standing at a gain before the end of the tax year on 5 April to use the annual exemption.
A capital gain may be relieved potentially saving up to 28% tax where a qualifying investment is made in the Seed Enterprise Investment Scheme. However, this only applies to 2012/13 gains so time is running out.
A capital loss can be claimed on an asset that is virtually worthless. Where the asset is of ‘negligible value’ by 5 April 2013 the capital loss can be used in 2012/13.
No CGT planning should be undertaken in isolation. Other tax and non-tax factors may be relevant, particularly inheritance tax, in relation to capital assets.
Investments – are yours tax efficient?
Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for each tax year, therefore to take advantage of the limits available for 2012/13 the investment(s) must be made by 5 April 2013.
An individual aged 18 or over may invest in one cash ISA and one stocks and shares ISA per tax year but limits apply.
The rules include a single lifetime limit of £1.5 million on the amount of pension saving that can benefit from tax relief as well as an annual limit of £50,000 on the maximum level of pension contributions.
The annual limit includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual limit are taxable on the individual. Tax relief is currently available on pension contributions at the tax payer’s marginal rate of tax.
Therefore a higher rate tax payer can pay £100 into a pension scheme at a cost of only £60. An additional rate taxpayer can pay £100 in at a cost of only £50. Indeed for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 50%.
All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings (NRE). There is no facility to carry contributions back to the previous tax year.
Directors of family companies should, as an alternative, consider the advantages of setting up a company pension scheme or arrange for the company to make employer pension contributions.
If a spouse is employed by the company consider including them in the scheme or arranging for the company to make reasonable contributions on their behalf.
Employer provided cars and fuel
Employer provided car benefits are calculated by reference to the CO2 emissions and the car’s list price. The level of business mileage is not relevant.
The greener (environmentally!) the car, the lower the percentage charge. No charge currently applies for an electric car with other cars ranging from 5% to 35% of the list price of the car.
Check your position to confirm that an employer provided car is still a worthwhile benefit. It may be better to receive a tax free mileage allowance up to 45p per mile for business travel in your own vehicle.
If an employer provided car is still preferred, consider the acquisition of a lower CO2 emission vehicle on replacement to minimise the tax cost.
Where private fuel is provided, the benefit charge is also based on CO2 emissions. You should review any such arrangements to ensure no unnecessary tax charges arise.
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