For many, 2012 has been a tough year with the adverse weather affecting some businesses while the summer games have had differing affects on business. With the Government struggling to balance the public expenditure against tax revenues there is always the prospect of further stealth taxes around the corner. So, this is a good time of year for a tax check up - are you satisfied you are paying the minimum tax necessary? With a top rate reduction imminent, but the curtailing of a number of well used reliefs, there really is no time like the present to take a step back and look at how you are managing your personal finances and your business, and consider how you might reduce your taxes and/or improve your financial and business strategies.
Below are a few of the ways to help achieve a more secure future for you, your family and your business. Please contact us now to discuss your specific situation and the planning opportunities you could consider before the end of the tax year. Acting now could pay dividends in the future.
New Tax Rates
The 50% additional rate of income tax remains on taxable incomes above £150,000, but this rate reduces to 45% on 6 April 2013. This means that those who are able to defer income from 2012/13 to 2013/14 could benefit from a 5% or more reduction in the tax charged on the amount deferred. This is a key planning area you may wish to discuss with us.
Once again, 50% is not actually the top rate of tax. Those with income of more than £100,000 suffer a withdrawal of their personal allowance. For every £2 over the income limit the personal allowance will reduce by £1, meaning that affected taxpayers will bear a 60% effective rate of tax on a band of income of £16,210.
The income for this purpose is after any reduction for pension contributions and gross charitable donations and so these can be particularly tax efficient, especially when your income is just over £100,000.
Extracting Profits from a Company
Whether you are considering extraction of profits from a company on a tax year basis or aligned to the company year end, there are a number of issues that should be considered.
- Salary: National insurance contributions are expensive but salary can be deducted from taxable profits in the company, so if some profits are taxed at the marginal small profits rate (currently 25%), there is very little difference between extracting profits by way of salary or dividend for higher rate taxpayers. Nevertheless, for most, the extraction of profits by way of dividends remains the most tax efficient option.
- Bonuses: 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.
- Dividends: 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 opposed to salary is that no national insurance is payable on dividends.
- Benefits in kind: Some benefits in kind are still quite tax efficient, including the provision of a company mobile telephone and a car with low emissions. Such cars may also qualify for a 100% first year allowance in the company. Other benefits may be taxable and liable to employer national insurance but there is no employee national insurance.
- Pension contributions: The same test applies to pension contributions for director shareholders as applies to the spouse of a shareholder/director. Provided the total salary package (ignoring dividends) is reasonable for the input of the director into the company, then all salary plus pension contribution should be allowed as a deduction against profits. Remember that there is an annual limit on pension contributions, which is now just £50,000, though unused limits from previous years can be used. Contributions in excess of this will trigger a tax charge on the member.
- Pension contributions are paid net of basic rate tax, and the pension provider recovers the tax element. Up to £3,600 per year (gross) may be invested by any individual irrespective of whether they have earnings to match it or not.
- Pension contributions also save higher rate and additional rate tax for those liable, and this relief is normally given through the self assessment tax return.
- Tax relief is generally only available for pension contributions of up to £50,000 a year, including contributions made by your employer.
- You may be able to use up any unused relief from the last three years, making a substantial contribution in one year if the previous years have been low. However, it is essential that you know your 'pension input period' in order to plan for this - it is not usually the same as the tax year, so you will need to check. We can advise you as to what level of contributions would be allowable in the current year.
- If you are a member of a defined benefit or final salary scheme, your £50,000 limit is tested against the value of your benefits under the scheme rather than the contributions made. You may need to contact your pension administrator in order to get the information you need to plan additional contributions.