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End of year tax planning 2012/13

Kevin McDaid, Chartered Tax Adviser (ATT, CTA) Ex HMRC, 30 years + experience

52 Albert St, Thornton, Bradford, BD13 3ER

kevmcd@cta.org.uk, Mob 07939 222437, Tel 01274 214979

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17 March 2013

End of year tax planning

 

The 2013/14 tax year starts on 1 April 2013 for companies and 6 April 2013 for individuals.

 

The next couple of weeks offer a final chance to reduce this year’s tax liability, next year’s or both; whether this is from a personal perspective, for your family or for your business.

 

There are some significant tax and benefit changes occurring in 2013/14 which may have an impact on your tax position. Some are beneficial (such as the increase in the personal allowances) but others are not (such as the means testing of Child Benefit). With a little simple tax planning many of the detrimental impacts can be reduced.

 

We already know many of the tax rates that will apply in the new tax year and these detailed below:

Income tax

INCOME TAX RATES AND TAXABLE BANDS

Rate

2011/12

2012/13

2013/14

Basic rate: 20%

£0-£35,000

£0-£34,370

£0-£32,010

Higher rate: 40%

£35,001-£150,000

£34,371-£150,000

£32,011-£150,000

Additional rate: 50%

Over £150,000

Over £150,000

n/a

Additional rate: 45%

n/a

n/a

Over £150,000

 

IMPACT OF CHANGES TO INCOME TAX AND NATIONAL INSURANCE

Income

Income after tax (before 6 April 2013)

Income after tax (after 6 April 2013) 

Change

£10,000

£9,334

£9,619

3.10%

£20,000

£16,134

£16,419

1.80%

£30,000

£22,934

£23,219

1.20%

£40,000

£29,734

£30,019

1%

£50,000

£35,781

£35,964

0.50%

£70,000

£47,381

£47,564

0.40%

£100,000

£64,781

£64,964

0.30%

£130,000

£78,939

£78,588

-0.40%

£150,000

£90,539

£90,188

-0.40%

£200,000

£114,539

£116,688

1.90%

£500,000

£258,539

£275,688

6.60%

 

·          Whilst the personal allowance for those aged under 65 will be increased by £1,335 to £9,440 (meaning that you can earn £181 per week before being liable to pay income tax compared to £156 in 2012/13), the lowering of the threshold at which 40% tax is paid from £34,370 to £32,010 means that most will see a positive change, but bizarrely, due to the cut in the highest rate of income tax from 50% to 45% for those with taxable income exceeding £150,000, it is the most well off who will benefit the most.

 

·          The lowering of the 40% tax threshold 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

Benefits 

·          An important new threshold for parents obtaining Child Benefit is £50,000. Any parent earning above this will, effectively, have an element of the Child Benefit withdrawn. Withdrawal is total if income is over £60,000, and partial for income between £50,000 and £60,000.

 

·          The way it will work is that child benefit will continue to be paid out in full but if one parent receives taxable income in that tax year exceeding £60,000 the whole of benefit will be repayable once the Self Assessment tax return is completed. Part of the benefit will be repayable if taxable income is between £50,000 and £60,000. The benefit will be repayable by the parent with the higher income rather than the parent who actually receives the benefit.

 

·          So that HMRC can check the right to claim Child Benefit it is anticipated that 1 million more tax returns will need to be completed going forward. It will be your responsibility to inform HMRC if a repayment of the benefit is required by 5 October after the end of the tax year.

 

·          If you know that your income will exceed £60,000 you may wish to notify HMRC that you do not want to receive Child Benefit in 2013/14 (rather than receiving it, only to pay it back). This must be done by 28 March 2013 at http://www.hmrc.gov.uk/stopchbpayments

 

·          Child benefit has been capped at £20.30 a week for the first child and then £13.40 for each child after that, until April 2014.

 

·          Parents earning more than £50,000 and hit by the child benefit tax charge should consider making pension contributions in order to reduce their taxable income to below £50,000 which could restore their child benefit in full.

 

·          A fact sheet is available covering the Child Benefit changes.

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 24% to 23%. With the company tax rate being just 20% for profits up to £300,000 whilst an individual will pay 40% tax on taxable income exceeding £41,450 there are many tax planning opportunities for those choosing to operate through a limited company. This is not just relevant for trading businesses, property investors subject to higher rate tax could also benefit.

Please contact me for a fact sheet on the choice of business medium, setting up a limited company and the tax savings to be made.  

Tax credits

For many these are a thing of the past. However, for anybody still able to claim please note that from April this year, any income increase for a household of more than £5,000 for the tax year will reduce a claimant’s tax credits award for the 2013-14 tax year. This amount has fallen from the previous figure of £10,000. I would suggest that it will be necessary to keep a much closer check on family income and keep HMRC informed of any increases in order to avoid a tax credits overpayment situation.

Pensions 

A guarantee for the basic state pension means it will rise by 2.5 per cent in April, taking it to £110.15 a week. Additional state pension is up 2.2 per cent. 

‘Granny tax’ 

At present, pensioners who earn less than £25,400 a year get a more generous tax-free allowance - £10,500 for 65-74 year-olds and £10,660 for those aged 75 and over.

 

However, in 2013/14, allowances for anyone already over 65 will be frozen, while the extra allowance will be scrapped for anyone who turns 65 after 5 April. These pensioners will then be subject to the same personal allowance (£9,441 from 6 April) as workers. You may recall this was dubbed ‘granny tax’ after last year’s budget. 

Capital Allowances

The annual investment allowance (AIA) which gives 100% tax relief on the first £25,000 of qualifying capital expenditure was increased to £250,000 with effect from 1 January 2013. Whilst most small businesses will be unaffected by this (as their annual capital spend is unlikely to be above the previous £25k threshold) if significant expenditure is contemplated please contact me before taking further action because it is not as simple as, ‘if purchased after 31/12/12 it will qualify for £250k AIA, but if purchased before it will not.’ Instead, the entitlement to claim corresponds with when your accounting period ends, i.e. a business with a year end of 31/03/13 will only be entitled to 9 months allowance at £25,000, i.e. £18,750 plus 3 months allowance at £250,000, i.e. £62,500 (total £81,250). Remember, all but the most CO2 efficient cars do NOT qualify for AIA, but vans do. 

Business Cars

Following on from the above there are significant changes in the tax reliefs available on business cars, including capital allowances on purchases, from the start of the new tax year as the government presses forward with its ‘green motoring plan’.  There are currently three rates of capital allowances for car purchases: 

·          Any car with a CO2 emission below 110g/km will attract 100% AIA (see above).

·          Cars between 110 and 160g/km attract 18% capital allowance tax relief per annum

·          Cars over 160g/km currently only obtain 8% capital allowance tax relief per annum. 

The thresholds have dropped as follows: 

·          100% reduces from 110g/km to 95g/km;

·          18% reduces from 160 to 130g/km;

·          8% annual relief applies on any car purchase with emissions over 130g/km. 

The impact of these changes is best represented by a couple of examples: 

·          Capital allowances of 100% can be claimed in the year of purchase on a BMW 116d Efficient Dynamics 3dr Sports Hatch with CO2 emissions of 99g/km, if purchased by 31 March 2013 (5 April 2013 for unincorporated businesses). If the same car is purchased from 1 April 2013 (6 April 2013 for unincorporated businesses) 18% writing down allowances are instead available. 

 ·          Writing down allowances of 18% per annum can be claimed on a Honda Civic 1.8 i-VTEC SE 5dr Hatchback with CO2 emissions of 137g/km, if purchased by 31 March 2013 (5 April 2013 for unincorporated businesses). If the same car is purchased from 1 April 2013 (6 April 2013 for unincorporated businesses) 8% writing down allowances are instead available. 

It is, therefore, worth considering bringing forward the purchase of any new vehicles into the period before April 2013 as it may be possible to accelerate the tax relief on any purchases. The following table shows that, based on the current rates, after 5 years only 63% tax relief would be obtained on a car currently emitting between 110 and 160g/km and this will drop to 34% after 5 years for any car emitting greater than 130g/km.

 

Capital allowances on car purchases

 

 

 

 

 

 

Purchase Price

£15,000

 

 

 

 

 

 

 

 

 

 

 

 

 

CO2 rating

 

Below 110g/km

 

111g/km - 160g/km

 

 

160g/km +

 

 

 

 

 

 

 

 

Year 1 tax relief

 

 

 

 

 

 

 

100%

 

£15,000

 

 

 

 

 

18%

 

 

 

£2,700

 

 

 

8%

 

 

 

 

 

 

£1,200

Carry forward to year 2

 

£0

 

£12,300

 

 

£13,800

18%

 

 

 

£2,214

 

 

 

8%

 

 

 

 

 

 

£1,104

Carry forward to year 3

 

 

 

£10,086

 

 

£12,696

18%

 

 

 

£1,815

 

 

 

8%

 

 

 

 

 

 

£1,016

Carry forward to year 4

 

 

 

£8,271

 

 

£11,680

18%

 

 

 

£1,489

 

 

 

8%

 

 

 

 

 

 

£934

Carry forward to year 5

 

 

 

£6,782

 

 

£10,746

18%

 

 

 

£1,221

 

 

 

8%

 

 

 

 

 

 

£860

 

 

 

 

£5,561

 

 

£9,886

 

 

 

 

 

 

 

 

After 5 years, tax relief obtained

 

£15,000

 

£9,439

 

 

£5,114

 

%

100%

 

63%

 

 

34%

 There are similar reductions in the thresholds applying if cars are obtained via lease options. 

Planning Points 

Anybody who has income above the thresholds detailed above should consider seeking to reduce their income so that they fall just below the threshold. This may result in you dropping from being a 40% taxpayer to a 20% payer or from being entitled to reduced Child Benefit to being entitled in full. For those earning between £100,000 and £118,880 P/A the loss of personal allowances means that the tax rate is 60%; i.e. you are being taxed considerably more than a 45% taxpayer (from April 2013) with earnings exceeding £150,000.  

Pension contributions are an obvious way to reduce your taxable income. However, the following may also be considered: 

·          You and your partner might be able to reorganise your financial affairs to avoid exceeding one of these limits. However, there might be capital gains tax (CGT) to pay on switching ownership of an investment if you are not married or in a civil partnership.

·          Redistribution of investment capital to a spouse with a lower income so that the income generated is taxed on them instead.

·          Reallocation of dividend income for couples who run their business through a company.

·          Reinvestment in tax-free investments, such as an ISA, so that taxable income is replaced with tax-free income.

·          Reinvestment in tax-efficient investments that generate no income and so will not impact on the loss of the personal allowance. 

·          A ‘new kid on the block’ this year from a tax-efficient investment perspective is Seed Enterprise Investment Scheme (SEIS). This is a new scheme available for shares issued by smaller companies. A maximum of £100,000 subscribed can attract 50% income tax relief (or, if less, the amount of your income tax liability), which is withdrawn if the shares are realised within three years. Any gain on their sale after three years is exempt from CGT.

·          If you are in business, you could pay a non-earning partner a salary on which you will get tax relief. From the start of the next tax year you will not need PAYE records if the salary is below the national insurance contributions (NICs) limit, which is £464 a month in 2012/13. If, however, the salary is between £464 and £634 a month, your partner will avoid paying any NICs, but will still qualify for state benefits, such as a pension. In particular, your partner’s benefits under the state second pension will accrue at a flat rate of £88.40 a week (a minimum yearly income of £5,564 is needed to accrue state second pension in 2012/13).

 

·          As well as salary, you can pay an employer’s contribution to your partner’s personal pension plan. There is no tax or NICs on the payment itself, and it should be an allowable business expense. Be warned that the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work performed.

 

·          Alternatively, you could plan ahead to share the profits of your business by operating as a partnership in 2013/14. You both need to be genuinely involved as business partners, though not necessarily equally. 

Next Action 

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.                                                 

If you do wish to discuss any of the points raised in this factsheet  please do not hesitate to contact me. 

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’.

Ċ
Kevin McDaid,
17 Mar 2013, 14:20
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