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End of year tax planning pointers

Whether you are a business owner or a full time stay-at-home parent, there are measures you can take now to minimise your tax liability this tax year.

Income tax saving for couples

Any personal allowance (£7,475 for 2011/12) that is not used at the end of a tax year cannot be carried forward. However, couples can make use of each other’s unused allowances through methods such as transferring ownership of income generating assets (such as savings and investments). Couples can also jointly own income generating assets, where the income will automatically be split 50-50, unless otherwise specified, but the income paid must correspond to the proportion owned (this is only possible if you are married or civil partners).

Extracting profits from a company

National insurance contributions are expensive, but salary can be deducted from taxable profits in the company, so if profits are taxed at the marginal small companies rate (currently 27.5 per cent), there is very little difference between extracting profits by way of salary or dividend for higher rate taxpayers.

Where annual bonuses are payable, the bonus must be due and payable before the company year end, even if the specific amount has not been decided. This is necessary to benefit from tax relief against the profits of the period. The bonus must always be paid within nine months of the year end to secure the tax deduction in the company.

These are subject to a lower rate of income tax than other sources of income, though this is mitigated by the company not being able to claim corporation tax relief. The main advantage of payment by dividend as against salary is that no national insurance is payable on dividends.

Capital gains tax

As with income tax, each person has an annual exempt amount, which is wasted if not used. This currently stands at £10,600 for individuals and personal representatives. Any gains in excess of this limit are then taxed at 18 per cent up to the limit of the basic rate income tax band, and 28 per cent on gains above that limit. Couples should make sure that both limits are used by jointly owning, or transferring assets prior to a gain being made.

Inheritance tax

Every year you have an annual exemption for gifts of up to £3,000, which if not used, may be useable in the next. This is the total of gifts in any tax year that are ignored in the event of the donor’s death within seven years.  It is important that you have an up to date will in place, which takes into account the most up to date inheritance tax rules. For example, you are currently able to leave £325,000 worth of legacies without paying IHT, the equivalent of £650,000 for couples, but this allowance may well change.

Savings and investments

The deadline for using all of your tax efficient saving and investment allowances is 5 April 2012. Anything you have not used will be lost. Current limits are:

  • ISAs – £10,680 into a stocks and shares ISA, £5340 of which can be put into a cash ISA. Please note that you are only allowed one of each type of ISA in one tax year, and while transfers from cash ISAs into stocks and shares ISAs are allowed, you cannot transfer stocks and shares ISAs into cash ISAs.
  • Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) – EIS schemes provide 30 per cent tax relief in 2011/12 on investments of up to £500,000. Investments can be carried back by up to one year provided the limit in the previous year was not reached. VCT investments offer tax relief of 30 per cent of the amount invested, with a limit of £200,000 in any tax year.

A vital part of our role is to make sure that you are keeping your tax liability to a minimum. Please do not hesitate to contact us if you would like to discuss any areas of end of year tax planning.