Act now to avoid higher tax bills

The end of the tax year (5th April 2010) is quickly approaching, with a possible Budget prior to then. Now is a good time to consider tax planning ideas if you want to pay less tax. If you wait too long you could be missing tax saving opportunities.

This edition of 'Pay less tax' focuses on some key tax saving opportunities that you may wish to think about before the end of the tax year. As everyone's circumstances are different we would be delighted to talk to you in detail about how the rules apply to you and how you could save tax.

We want to help you pay your fair share of tax… and not a single penny more!

Extract profits tax free or little tax

Maximise the amount of dividends you take before 6th April 2010, if you own shares in your own company. Providing your own gross income (including the dividend) remains below the higher rate tax threshold in a tax year (currently £43,875), then there is no further tax to pay on the dividend. Care is required to ensure the relevant documentation is completed and approved prior to the payment being made.

It may also be worth ensuring that basic rate tax bands for spouses are fully utilised by receiving dividends to take their income up to the higher rate threshold. As there are currently no income shifting provisions there may be scope to do this depending upon full circumstances.

Providing profits are available for the dividend then this can be a tax efficient way of taking monies from the business. You may wish to have the funds personally available, or perhaps prefer to safeguard the cash from future trading difficulties. Alternatively you may prefer to leave the cash in the company, in which case you can still declare the dividend and maximise tax savings.

If your income exceeds the higher rate threshold you can still consider dividends, but you will lose up to a quarter of the payment in tax. Although dividends are quite a cheap way to extract profits from the business, there are other alternatives. We do offer a remuneration review to establish the most tax efficient options for your circumstances. Please contact us if you want to find out more.

Plan pension contributions

Pension contributions paid by an employer can often be more tax efficient, than you paying personally into your pension scheme. There is an immediate saving in National Insurance for both the company and yourself, and there can be a cash flow saving on the tax.

Normally you are liable to tax and National Insurance on the salary that you receive from the company. On top of this the company is normally liable to further National Insurance. This tax and National Insurance is often paid over to HM Revenue & Customs shortly after the salary is paid to you.

If you make pension contributions personally you would then look to reclaim higher rate tax on the contributions, some months after the tax year in which the contributions were made. This could be up to 22 months after the first contribution was made.

To save money and ease cash flow, you could consider “employer” contributions into your pension pot. Providing certain conditions are met, there is no liability to tax or National Insurance if the company pays employer contributions into your pension scheme. It may also be possible for the company to get full tax relief for the contributions in the same way had it paid you the contributions in extra salary. The National Insurance saving alone could be up to 23.8% of the contributions and so it is worth considering.

In current times of cost cutting you could even consider this for your employees. You could use a “salary sacrifice” scheme, where the employee receives less salary and the employer pays into their pension pot. Care needs to be taken on setting this up. However with potential savings of up to 23.8% of the salary between the employer and employee, it is worth getting it right.

VAT - Make life simpler

In order to ease the administrative burden for the business, cut costs or perhaps improve cash flow, have you considered using Annual Accounting, Cash Accounting or the Flat Rate Schemes?

Annual accounting is just that - you will only have to complete one VAT return each year and this has to be submitted 2 months after your tax period has ended. You will have to make interim payments during the year (usually nine) and a balancing payment when your return is completed. Admission to the scheme is subject to conditions including taxable turnover of less than £1.35M.

Cash Accounting helps businesses struggling to collect debts. Under the scheme the business will not be liable for VAT on invoices it raises, until it receives the cash. This can be a significant cash flow advantage for some businesses. Admission to the scheme is subject to conditions including taxable turnover of less than £1.35M.

The Flat Rate Scheme can make completing your VAT Return even simpler. How does it work? You multiply your total VAT inclusive turnover for the tax period by the percentage relevant to your business type and this is the amount you pay, there is generally no claim for input tax. The only adjustment you would ever make was if you bought an expensive capital asset.

The flat rate scheme is not right for everybody, as some of the percentages set by the government result in more VAT being paid. However for some businesses there can be both an administrative saving as well as a tax saving. Admission to the scheme is subject to conditions including taxable turnover of less than £150,000.

Save tax on your investments

Income Tax relief of 30% is available on investments up to £200,000 into a Venture Capital Trust (VCT). Any dividends received would be exempt from income tax and the eventual sale of the shares would be exempt from Capital Gains Tax, providing certain conditions are met.

Income Tax relief of 20% could be enjoyed on investments up to £500,000 into an Enterprise Investment Scheme (EIS). The eventual sale of the shares would be exempt from Capital Gains Tax, providing certain conditions are met. Under current legislation EIS investments may be exempt from Inheritance Tax after two years of holding such an investment. Not only that, but it may be possible to defer any other personal capital gains into the investment to avoid paying Capital Gains Tax now.

If you are setting up a business and introducing funds, then it may be possible to enjoy the same tax breaks as for an EIS investment. Care would be needed as there are a number of conditions to meet, but the tax savings could be substantial.

It is worth paying the maximum contributions into an ISA (Individual Savings Account) before 5th April 2010! You may ask why? Well, subject to the risks and possible rewards under the current economic climate, ISAs are still exempt from Income Tax and Capital Gains Tax. If you are looking to invest, then ISA's are well worth thinking about, often instead of ordinary deposit accounts.

Currently up to £7,200 could be invested into an ISA, of which up to £3,600 can be cash investments each tax year. If you are aged 50 or over then the ISA limit is currently £10,200 of which up to £5,100 can be in cash. Financial advice should always be sought to ensure the right investments are made for your circumstances and the risks you wish to take.