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Tottel's Income Tax Annual 2006-07 by Sarah Laing, CTA

Sarah Laing CTA highlights some straightforward potential income tax planning opportunities.

Introduction

Proper tax and financial planning can lower and defer a liability to income tax, freeing up cash for investment, business or personal purposes. However, whilst the tax implications of any planned investments should play an important part in investment strategy, no transaction should be undertaken purely for tax reasons. The wider financial aspects must also be carefully considered, especially where its value represents a large part of the family fortunes or where it provides a livelihood for one or more members of the family.

The most basic form of year-end planning often involves pushing tax bills into the future by deferring income into the next year and accelerating deductions into the current year.

Individuals

The following points may be considered by taxpayers before the end of each tax year to help minimise their annual liability to income tax:

● Ensure that personal allowances and basic rate bands are fully utilised. Using personal allowances and basic rate bands is an obvious point but is surprisingly often missed. Unused allowances are not available to be carried forward so it is important to ensure that they are utilised each year. Simple planning can be applied, such as changing ownership of assets or creating an employment. However, care is needed to escape the anti-avoidance legislation.

● Ensure that tax is being paid at the lowest rate on investment income. If a spouse, or civil partner, pays tax at a different rate, consider transferring income-producing assets to give the income to the person paying at the lower rate.

● As a general point, a review of bank and building society accounts should be made before the tax year end. Many people still have large sums of cash in ordinary accounts paying very little interest when they could be earning over 5% gross interest from specialist accounts. Make sure that ISA allowances have been fully utilized for all the family.

● Small, regular amounts can be saved in Individual Savings Accounts (ISAs). With a limit of £7,000 on annual savings, a couple could save £70,000 by the time the current limits next come under review in 2010.

● Regular sums can be invested in National Savings (some products offer a tax-free return, which is particularly attractive to 40% taxpayers), banks and building societies. Those willing to accept the possibility of greater risk perhaps equaling greater reward might consider the stock market, stock market-linked investments or buy-to-let property.

● Ensure that adequate pension contributions have bee made. Paying pension contributions can give tax relief at the maximum income tax rate of up to 40%.

● Consider paying into pensions for family members. The introduction of stakeholder pensions allow contributions to be made for all UK residents, even children, as there is no requirement to have any earnings. Consider making payments of up to £3,600 for family members, as the fund will grow in a tax-free environment. The net cost is only £2,808.

● Take advantage of tax exemptions. Everyone has a yearly capital gains exemption. In 2006/07 the exemption is £8,800 and gains up to this figure can be made without tax. Taxpayers should therefore consider realising gains from investments up to this figure. Gifts between spouses and civil partners are tax-free so it is possible to double the yearly exemptions available by giving shares or other investments to a spouse or civil partner.

● Realise losses. With regards to shares standing at a loss, consideration should be given to selling them so that the loss can be set against any gains made over and above the capital gains annual exemption. If the taxpayer wishes to retain the investment, it could be bought back by the spouse or partner, within an ISA or an existing PEP. It will not be tax effective for the taxpayer to buy back the investment unless he or she waits for 30 days before doing so.

● Capital gains tax may be deferred through the use of a venture capital trust or Enterprise Investment Scheme investment.

● Making charitable donations via the Gift Aid Scheme is an effective way to reduce taxable income. If donations have been made, it is important that the taxpayer has ticked for gift aid so that the charity can benefit from the basic rate tax relief. Higher rate taxpayers should make the necessary claim on their tax return for further relief. If future donations are planned, the taxpayer may wish to bring these forward to before 5 April to ensure the tax relief is obtained at an earlier date.

● Employees should check that their PAYE tax code number for the following tax year is correct and ensure that any inaccuracies are amended.

Businesses

The following points may be considered by businesses before the end of each tax year to help minimise their annual liability to income tax:

● Small businesses will qualify for first year capital allowances on plant and machinery at the rate of 50% for spending between 1 April 2006 and 31 March 2007. Therefore, businesses considering making a capital purchase may consider doing so before 31 March 2007.

● Companies with profits between zero and £50,000 should seek professional advice before the end of 2006/07 regarding the dividends paid to shareholders and the demise of the nil rate band for corporation tax purposes.

● If it is usual practice for the company to pay bonuses to directors or dividends to shareholders, careful consideration should be given as to whether payment should be made before or after the end of the tax year. This will affect the payment date for any tax and may affect the rate at which it is payable. Remember that any bonuses must be paid within nine months of the company’s year end to ensure tax relief for the company in that period.

● Where there are beneficial loans made to office holders and employees, these should be reviewed prior to the end of the tax year and accounting year to minimise income tax, national insurance and corporation tax.

● Where remuneration can be justified, it may be beneficial to make payments to a spouse or other family members to reduce the overall tax and national insurance liability.

● Review timing of disposal and acquisition of business assets to minimise tax or obtain tax deferral.

● Deferment of Class 2 and 4 National Insurance contributions for 2006/07 should be obtained if Class 1 contributions will be paid on employment income.

● Employers may consider making tax-free gifts to staff, including:

● Long service awards. Broadly, there will be no tax charge so long as the employee has been employed for at least 20 years and the article given has a value not exceeding £50 for each year of service.

● Suggestion scheme awards. Such awards must be made under a properly constituted suggestion scheme, based on a set percentage of the expected financial benefit to your business. The maximum award allowed is £5,000. There is also a concession for ‘encouragement awards’ of £25 or less to reflect meritorious effort on the part of the employee concerned.

● Staff functions. Staff annual functions (eg a dinner dance or Christmas party) are tax-free where the total cost per person attending is not more than £150 per year (including VAT).

● Promotional gifts. Such items are normally purchased for advertising purposes and must display a ‘conspicuous advertisement’. Staff may receive promotional gifts tax-free provided that the overall cost of the articles involved does not exceed £50 per person per year. Gifts of food, drink, tobacco or vouchers are specifically excluded.

● If it is expected that profits from a business will be below the small earnings exception (£4,465 in 2006/07), exception from payment of Class 2 contributions can be applied for.

● Employers should review dispensations for items normally declared on form P11D.

● Employers should check procedures for year-end payroll returns as deadlines will approach after 5 April.

National Insurance contributions

The following points may be considered by employers wishing to mitigate NICs:

● Increases in the amount the employer contracts to contribute to company pension schemes.

● Share incentive plans (shares bought out of pre-tax and pre-NIC income).

● Small companies may consider disincorporation and instead operating as a sole trader or partnership.

● Reduction in salary and increase in bonus to reduce employee (not director) contributions.

● Payment of dividends instead of bonuses to owner-directors.

● Provision of childcare.

Sarah Laing CTA
September 2006

Sarah Laing CTA is author of ‘Tottel’s Income Tax Annual 2006-07’, from which the above article is extracted. The book is one of ‘Tottel’s Core Tax Annuals 2006-07’. The series is due to be launched in September 2006. Each of the new Core Tax Annuals costs just £19.95, or all six cost just £99.50! The Core Set comprises:

o Tottel's Corporation Tax 2006-07;

o Tottel's Capital Gains Tax 2006-07;

o Tottel's Income Tax 2006-07;

o Tottel's Inheritance Tax 2006-07;

o Tottel's Trusts and Estates 2006-07; and

o Tottel's Value Added Tax 2006-07.

To order Tottel’s Core Tax Annuals 2006-07 click here