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End of year tax planning 2011/12

Kevin McDaid, ATT, CTA, Ex HMRC, 25 years + experience

120 Reevy Road, Wibsey, Bradford, BD6 3QE

kevmcd@cta.org.uk, Mob 07939 222437, Tel 01274 407004


(20 March 2012) This fact sheet is not intended to give you a comprehensive list of tax planning opportunities, nor does is it tell you the patently obvious such as ‘do not waste your ISA allowance’ (assuming you have sufficient spare cash to invest). Instead, it aims to draw your attention to some of the tax changes taking place in the new tax year, beginning in April, which may have a significant impact upon you and/or your business.

If there is an issue that you feel is relevant to you that is not mentioned here please do not hesitate to contact me to discuss. It is simply not possible to cover all bases in such a limited space.

We already know many of the tax rates that will apply in the new tax year and I will begin by recapping these.

Income tax and National Insurance contributions (NICs)

• The personal allowance for those aged under 65 will be increased by £630 to £8,105 (or £156 per week).

• However, the basic rate threshold (the point at which 40% tax becomes payable) is to be reduced by £630 from £35,000 to £34,370 to counteract the increased personal allowances – this will mean that more taxpayers in the UK will be classed as higher-rate tax payers without their income having increased.

• Becoming a higher rate taxpayer may mean that Self Assessment Tax Returns will need to be completed going forward. The criteria for tax return completion can be viewed at http://www.hmrc.gov.uk/sa/need-tax-return.htm

Company tax

Small companies’ rate remains at 20% for profits below £300,000. The top rate of CT (payable on profits exceeding £1.5m) drops from 26% to 25%.

Tax credits

Important changes are coming to the Tax Credits system which you should be aware of:

From 6 April 2012

• Claims can only be back-dated by one month (instead of three).

• The income limit for Child Tax Credit is going down. At the moment, you can usually get some Child Tax Credit, as long as your income is not over the limit of £41,300. From 6 April 2012, this limit will be lower for most people. The income limit is determined by your own situation. However, as a rough guide, you might not be able to get Child Tax Credit from 6 April 2012 if:
o you have one child, and your annual income is more than around £26,000
o you have two children, and your annual income is more than around £32,200.

• A fall of up to £2,500 of income year on year is disregarded. This is a new feature. Currently, if income falls by any amount as compared to the previous year, tax credits are adjusted so that the claimant receives an amount based on their new (lower) income. The new disregard means that tax credits will not be adjusted until income falls by more than £2,500 compared to the previous year.

• There are changes to the working hours requirements
o Couples with children will need to work 24 hours a week between them, instead of 16 hours.
o Over 50s will see the end of the 50+ element.

HMRC have recently been notifying many Tax Credits claimants that their claim for tax credits will end from April 2012 unless they notify HMRC that they wish to keep their claims open (by responding to the letter). HMRC’s assumption is that with the threshold for tax credits reducing many claimants who would have qualified for the standard £545 tax credits P/A will now have too much income to qualify. I would suggest that claimants should consider contacting HMRC to ensure that they remain within the tax credits system so that they have time to work out their income for the 2011/12 tax year without risking losing benefits. The changes to the backdating rule means that there is a potential to lose out if you leave the system and then have to go back in due to a change in circumstances such as redundancy or reduced profits. Further information (including examples) can be obtained at: http://www.hmrc.gov.uk/taxcreditsbudget/index.htm#5

Child Benefit

Whilst this change is not due until April 2013 it will have a significant impact on many and so I believe that it is worth bringing to your attention now. Child benefit will be removed for higher rate taxpayers from April 2013. When you consider that the higher rate tax threshold may be as low as £42,000 by the time we get to April 2013, many thousands will be worse off.

At present, child benefit is paid universally for those with children up to age 19 for those in full-time education, or 16 otherwise and is worth £20.30 a week for the first child and £13.40 a week for any other children. This means that in a two child household the child benefit is currently worth £1,752 P/A. This is a controversial move as the entitlement to child benefit is intended to be removed if either parent in a household is a higher rate taxpayer. This could mean that in household A where one parent works earning £45,000 P/A with the other parent looking after children and earning nothing, no child benefit would be received after March 2013. In household B where both parents work earning £40,000 P/A each they would continue to be entitled to child benefit beyond March 2013. 

For those in situations such as household A that are just into higher rate tax making additional pension contributions or gift aid payments should seriously be considered.

Hopefully, the Government will have reconsidered this proposal by this time next year so that the anomaly highlighted above will not take effect.

Furnished Holiday Lets

The qualifying conditions for FHLs will become more difficult to meet from 6 April 2012:

• A property must be available to let for no less than 210 days P/A (current minimum requirement is 140 days P/A).

• A property must actually be let for 105 days P/A (current minimum requirement being 70 days P/A).

These changes equate to a 50% increase in both the availability and actual letting.

Where owners will struggle to meet the new criteria, it could be worth considering either retaining the property for personal use, or transferring it to adult children or family members prior to 6 April whilst the property still qualifies for Capital Gains Tax (CGT) gift relief or rollover relief.

It should still be possible to claim CGT Entrepreneur’s Relief if the property is not transferred before 6 April and does not continue to meet the qualifying conditions, provided it is sold within 3 years of the deemed end of the trade. This gives an effective tax rate of 10% on any gain.

Capital Allowances

The annual investment allowance which gives 100% on the first £100,000 of qualifying capital expenditure is being reduced to £25,000 from 6 April 2012. Whilst most small businesses will be unaffected by this (as their annual capital spend is below the new £25k threshold) if significant expenditure is contemplated it may be worth accelerating this to pre 6 April (1 April for companies) to ensure 100% relief is obtained. Provided any contract is agreed and the obligation to pay has become binding by 5 April 2012 (1 April 2012 for companies), the actual payment can be due up to 4 months later.

Company Cars

A planned restructuring of the company car benefit table leaves those who have chosen more fuel efficient models facing a big hike in their tax bill this April, and these increases will continue, although the change in 2012 is a one-off hike. For example, a driver with a car emitting 120g/km will see his tax rise from 10% of list price to 15% of list price as we move from 2011/12 to 2012/13 – a 50% increase! Drivers outside the emission range 105g/km and 120g/km will see a 1% of list price increase in their benefit in kind. Drivers considering changing a company car can keep their tax charge down by balancing a low emissions rating with a modest list price.

Fuel for Company Cars

The increases in the fuel scale benefit each year have not kept pace with fuel price inflation, so it is possible that you may be better off reverting to free fuel from the company, and accepting payment of the tax on the fuel benefit. With diesel approaching £1.50 per litre the sweeping assumption that it is highly unlikely for it to be tax efficient to have fuel with the company car, is definitely no longer the case.

Conclusion

What had been generous tax breaks and benefits up until now (tax credits and child benefits) will soon cease for many as the Government seeks to ensure that any new tax breaks will not benefit higher rate taxpayers.

And there will be considerably more higher rate taxpayers after 5 April 2012 as the 40% starting rate is lowered, with this policy likely to continue in future years.

Next action

Please do not hesitate to contact me should you have any queries regarding any items in this factsheet.

Kind Regards
KEVIN McDAID

This communication is for general guidance only, and professional advice should be sought before any decision is made. Individual circumstances can vary and therefore no responsibility can be accepted by Kevin McDaid/Crown Tax Affairs, for any action taken, or any decision made to refrain from action, by any readers of this communication. All rights reserved. No part of this communication may be reproduced or transmitted in any form or by any means without prior agreement. To the fullest extent permitted by law, Kevin McDaid/Crown Tax Affairs do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from use of this communication.
Crown Tax Affairs can be contacted in writing at 120 Reevy Road, Bradford, BD6 3QE; via email – kevmcd@cta.org.uk or telephone on 01274 407004. If you do not wish to receive further emails from us please reply to this email indicating ‘UNSUBSCRIBE’.
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Kevin McDaid,
29 Mar 2012, 12:42
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