2007/08 Year End Tax Planning - UK
In this section consider just some of the ways you might act now to help achieve a more secure future for you, your family and your business. Please call 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. Act now to save money While there may be occasions in life where leaving things to the last minute can save money, such as a late holiday booking, in other areas any delay could cost you money. Tax planning is such an area. Effective planning requires time and consideration, but with our help, you could significantly reduce your business and personal tax burdens. This website guide is designed to highlight a range of planning opportunities, some of which expire on 5 April 2008. In particular, do please contact us to discuss the following:
Capital gains tax planning - significant changes Capital gains tax rules are changing from 6 April 2008 with a flat rate of 18% being introduced. However at the same taper relief for business and non-business assets will cease to exist. Thus for some there will be capital gains tax reductions while for others, particularly business owners, there will be increases. Annual exemption Each year an individual has an annual exemption to gains that are free of tax. This year it is £9,200. Thus an individual can realise net capital gains (gains less losses) of up to £9,200 from 6 April 2007 to 5 April 2008 without incurring a CGT liability. The exemption is an annual allowance and cannot be carried forward. Please seek our advice With the significant structural changes due to be introduced from 6 April 2008 it is more important than ever to discuss this area of planning with us. Business owners have become accustomed to thinking that capital gains tax on sale of their business ids 'a maximum of 10%'. You may not be thinking of selling your business just because of the changes in capital gains tax, but please do discuss with us the 'pregnant' capital gains tax liability based on the changes introduced in the Pre Budget Report as these changes will likely impact the net proceeds from your eventual sale. The potential reduction may need to be factored into your plans for the capital available to you from the sale of your business. Extract profits from your business and minimise your personal tax liability The new rules on pensions, the IR35 regulations, and the question of salary/bonus versus dividend are all factors which can make the task of extracting profits from your company harder to get right. In theory, the new pension rules mean that instead of funding pension savings yourself out of post-national insurance contributions (NICs) income, your company could contribute free of NICs (with a typical saving in the region of 13.8%). However, under pre-existing rules, HM Revenue & Customs is challenging 'extraordinary' contributions and arguing for dis-allowance of tax relief for the company in circumstances where company contributions have previously been at a significantly lower rate. The position on IR35 continues to be controversial, but in some cases personal service companies are being dissolved as 'consultants' return to the payroll. The question of whether it is better to take a salary/bonus or a dividend still requires careful consideration. A dividend is paid free of NICs, which would typically cost 13.8%, or even up to 23.8% in combined employer and employee contributions. The effect can be a considerable saving (hence IR35) but there can also be an increase in the value of the shares of your company if valuation is ever necessary (eg. for inheritance tax). 5 April is your last date for paying a 2007/08 dividend, and higher rate tax on that dividend will not be due until 31 January 2009. Claiming tax relief on your capital expenditure Capital allowances are the tax deduction your business obtains for depreciation and losses on disposal of assets - usually cars, plant, machinery and equipment - used in the business. They are available at a variety of rates, depending on the nature of the asset and the size of your business - ask us for details. The end of the tax year on 5 April 2008 and the end of your accounting year will govern when tax relief can be claimed. A purchase just before the end of the current accounting year will usually mean the allowance is available a year earlier than would have been the case, had the purchase been made just after the year end. Similarly, the disposal of an asset, particularly a car costing more than £12,000, may trigger an earlier claim for relief or even an additional charge to tax. Care needs to be taken - the date expenditure is incurred is critical to the timing of tax relief. Are you saving enough for your retirement? If you are relying on the State pension for your retirement income, you may be disappointed, since it provides little more than the bare minimum! To give your savings time to grow, it is important to invest adequately for retirement as early as possible. Once you reach your 50s, you may be at your earnings peak, have fewer family responsibilities, and mortgage costs as a percentage of income may be lower. Therefore, you can seriously focus on building retirement savings and assessing how much you will need to have invested to provide for the retirement you deserve. Investing in a pension scheme, whether a company or a personal scheme, allows you to enjoy tax breaks on your pension savings. These are tax reliefs as you invest, and a partially tax-free regime for your savings. Your employer can also contribute and obtain tax relief. Pension contributions based on 2007/08 earnings must be paid by 5 April 2008. Tax relief will be at a maximum of 40%, and the maximum investment is an amount equal to your earnings or the annual limit (£225,000 for 2007/08), whichever is the smaller. While you are waiting for your pension forecast from your pension provider, why not begin to put together a forecast of your spending needs, post-retirement, starting by looking at what you are really spending now? Only by comparing the two forecasts will you be able to say with any certainty that your retirement savings are on track. Is your Will up-to-date? If you are reaching retirement age it's possible that many years have passed since you made your Will. Your own financial circumstances may have changed, children will have grown up and grandchildren will be starting school - perhaps even reaching their teens. Your Will is one of the most important documents you will ever draw up, and yet people are often complacent - as many as 80% do not have Wills. Your Will is your 'last word' - your opportunity to spell out exactly how you want your estate to be divided, what gifts you want to make, and to whom. It is also your last opportunity to be tax-efficient. Nil-rate band trusts can save up to £124,000 per married couple, charitable gifts can be made free of inheritance tax, wealth can be made to skip generations, and although there may be a tax cost, Will trusts can operate to protect family wealth. We can advise you on all these aspects - call us to discuss your concerns. But please, most importantly:
ISAs - don't forget the deadline Gains and most income in Individual Savings Accounts (ISAs) are tax-free, and they are ideal for saving small, regular amounts. Charity appeals Whenever there is a natural disaster, reaching for the phone and pledging a donation is automatic for many people. Arrangements are made to transfer funds to the appeal charity, and within minutes the donation is made. Likewise with the many appeals for 'just' £3 a week: we are often happy to make arrangements to donate a modest regular amount to any number of charities. You will almost certainly have been asked to make your gift under the Gift Aid rules and if you are a higher rate taxpayer you are entitled to tax relief. For example, if you are a 40% taxpayer and donate £1,200 to charities over the year, you are entitled to nearly £277 of tax relief. And if that results in a tax refund, we can even tick a box on your Tax Return and have the refund made over to the charity of your choice - and that gift will also qualify for Gift Aid tax relief! Donations can be made regularly - by direct debit, for example - or a one-off. They do not even need to be made in cash - talk to us about gifts from business and gifts of non-cash assets. Record keeping has become vital under self assessment. We need to be able to prove every figure on your Tax Return and you should keep personal financial records relating to your Tax Return for at least six years. Your entitlement to Gift Aid tax relief might provide an incentive 5 April 2008 Year End Tax Planning
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