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Tax Tips:
Income Tax
Tax Credits
Individual Savings Accounts(ISAs)
Capital Gains Tax(CGT)
Personal Pension Plan Contributions
Trading Vehicles
Inheritance Tax(IHT)
Value Added Tax(VAT)
Capital Expenditure
Income Tax
Married couples should ensure that all personal allowances are utilised. Investments could be reorganised, sharing income appropriately and reducing tax.
If self employed and your wife/husband assists you in the business some way, perhaps maintaining business records or performing secretarial tasks, then allowances can be utilised by paying a small wage. This would minimise national insurance contributions and reduce the taxable business profits. New legislation being introduced from 6th April 2008 means that any allocation has to be justifiable.
Children who have savings should receive interest gross, without the deduction of income tax. Inland Revenue form 185 should be completed.
Profitable businesses should give serious consideration as to the vehicle through which trade is conducted. Although, small tax savings may be made by trading via a Limited Company, there are various other factors to take into consideration.
If you are an employee you should ensure the correct tax code is being operated by your employer, and that the code has been correctly calculated by the Inland Revenue.
Consideration should be given to a cash alternative rather than a company car. You need to ensure that you calculate the cost of having a company car compared with the cost of using your own. You should take into consideration the interest cost of the capital required to buy your own car, the number of business and private miles that you will cover each year, additional cost of business use insurance cover etc.
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Tax Credits
Working Tax Credit (WTC) and Child Tax Credit (CTC) were introduced for the first time in 2003/04. The rates of WTC and CTC for 2008/09 have been in many cases increased in line with inflation. Check your entitlement.
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Individual Savings Accounts
The maximum amount which can be contributed to a tax-free ISA is £7,200, from April 2008, with no more than £3,600 invested in a cash fund.
Capital gains from the sale of ISA investments are tax-free
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Capital Gains Tax
Attempts should be made to fully utilise the annual exemption limit, £9,600 for 2007/2008 (2006/2007 £9,200) which cannot be carried forward to following years.
Disposals could be brought forward prior to the end of the tax year to maximise the exemption threshold.
Where gains exceed the annual exemption limit in a tax year it is advisable to reduce the excess by creating losses. This could be achieved by bringing forward a disposal date which would otherwise fall after the end of the tax year.
It will be possible to defer the payment of Capital gains Tax on gains if the disposal of the asset is deferred until the next tax year, especially if the annual exemption has already been used in the current tax year.
Gifts between husband and wife are tax free. This is particularly useful when maximising annual exemptions and also IHT planning - see IHT section below -
Taper relief was abolised from April 2008 and a new simplified system introduced and all gains taxed at a rate of 18% or a lower rate of 10%. You should seek guidance to how this change affects you.
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Personal Pension Plans
As well as providing benefits upon retirement, personal pension plan contributions qualify for tax relief. Higher rate tax payers will get higher rate tax relief.
The maximum contributions payable are calculated by reference to your earnings, although anyone can contribute £3,600 gross (£2,880 net) to a stakeholder pension scheme regardless of their income.
Under stakeholder pension provisions all contributions are paid net of basic rate tax advancing the tax relief.
Higher rate taxpayers can claim additional tax relief of 20%, upon their Tax Returns.
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Trading Vehicles
Incorporation into a limited company will reduce the higher rate of tax of 40%. The small company corporation tax rate of 21% (rising to 22% next year) is applicable on retained profits (up-to £300,000). The potential tax saving are now quite small, in comparison to operating as a sole trader or partnership. There are various other considerations and factors to consider before incorporation.
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Inheritance Tax
If the value of your estate exceeds the threshold (2008/2009 £323,000) 2007/08: £323,000) your heirs could face a high IHT bill. Early IHT planning is essential, as assets, such as property, sometimes increase in value rapidly.
If you are married wealth could be redistributed so that the value of each estate is equal. Gifts to husbands or wives are tax-free.
To reduce the value of your estate there are various gifts and bequests which do not create a tax liability. A maximum £3,000 can be gifted tax free each tax year by an individual. There are also various other small exemptions available.
If a gift exceeds the annual maximum it may count as a potentially exempt transfer. These are potentially exempt from IHT if the donor survives seven years, and no tax is payable at the time of transfer. However, if the transferor dies within seven years the amount transferred will form part of the estate for IHT purposes and tax payable on reducing sliding scale based on the length of time which has elapsed since the gift.
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Value Added Tax
Compulsory VAT registration is necessary when your annual business turnover exceeds the registration threshold at the end of any month (Limit £67,000 from 1st April 2008). Penalties of up to 100% of the tax due may be charged for failure to register. Business turnover should therefore be monitored carefully.
Voluntary registration may be beneficial where your customers/suppliers are mainly taxable persons, but not where they are the general public. If no taxable supplies have yet been made, early registration will ensure input VAT suffered can be recovered.
A flat rate scheme can be applied for. It is aimed at simplifying record keeping and accounting requirements.There can be considerable savings by opting for this scheme It is available for businesses with an annual turnover below £150,000.
It is worth considering the pros and cons of the scheme
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Capital Expenditure
Bringing forward planned future capital expenditure to a day before the end of your current accounts financial year end will secure a full years capital allowances on the cost of the expenditure, and will reduce taxable profits accordingly.
A new annual investment allowance enabling allowances of up to £50,000 was introduced from April 2008. Careful consideration should be used when deciding whether to make major purchases prior or after this date. Further information can be found in our newsletters.
The notes above are guidance only and do not constitute specific advice.
Detailed professional advice should be taken before action or refraining from action.
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