After the Budget: planning strategies to implement now
George Osborne's 2012 Budget proved to be his most controversial to date, with widespread furore over the so-called 'granny tax', the ill-fated 'pasty tax' and the future cut in the 50p top rate of income tax.
While the dust has settled on the Chancellor's Budget proposals, the time for tax planning is just beginning. Here we examine some of the Budget measures in more detail, along with the corresponding tax planning opportunities that may be available to you and your business.
Increase in the personal allowance
Further to the recent increase in the personal income tax allowance to £8,105, the allowance will rise again in April 2013, to £9,205 for those born after 5 April 1948. The advantage to higher rate payers will be countered by a lowering of the higher rate threshold, to £32,245.
In a bid to simplify the tax system, the Chancellor also announced that from 2013/14, the age-related personal allowances will be frozen. Their availability will be restricted to people born on or before 5 April 1948:
Born 6 April 1938 – 5 April 1948
Born before 6 April 1938
All individuals with adjusted net income of over £100,000, regardless of their age, will have their personal allowance (PA) reduced by £1 for every £2 that it exceeds £100,000, until it reaches nil.
The withdrawal of the PA produces a marginal tax rate of 60% (in 2012/13 the band is between £100,000 and £116,210), making it essential to have in place a robust financial planning strategy.
Key planning strategies
Maximise personal allowances
You should consider taking action to ensure that you are making the most of the PA, particularly if you will be affected by the forthcoming freeze in the age-related allowances.
If your spouse or partner has little or no income, you might want to consider transferring income (or income-producing assets) to them to ensure that they are able to make full use of their personal allowances.
Similarly, it is costly for one spouse or civil partner to be paying tax at 40% or even 50% while the other pays tax at only 20%. Equalising income where possible ensures that you will both pay tax at the lowest possible rate, thereby reducing the overall combined tax bill.
Reduction in the additional rate of income tax
From 6 April 2013 the additional rate of income tax, which is levied on those with incomes over £150,000, is set to fall from 50% to 45%. Consequently, the dividend additional tax rate will be reduced in line with this from 42.5% to 37.5% and trust rates will mirror these changes.
Giving careful consideration to the timing and structure of your income could significantly reduce your tax bill.
Key planning strategies
Consider deferring income
If you are likely to be subject to the 50% tax rate in 2012/13, you might want to consider deferring your income into the following tax year (beginning 6 April 2013). This could mean that you would benefit from paying income tax at the lower rate of 45%.
There are a number of ways to defer your income, including:
- Delaying dividend payments: By electing to make dividend and bonus payments after 5 April 2013 and taking advantage of the lower tax rate, you could make significant tax savings.
- Salary versus company loan: Taking a company loan in place of a salary during 2012/13, and then repaying the loan in the following tax year could also afford tax savings. However, consideration must be given to the broader tax implications of such action.
Deferring income requires careful planning. Please talk to us about the most appropriate options for you and your business.
Maximise your pension contributions
For higher earners, maximising pension contributions (within limits) during 2012/13 will allow you to obtain relief at the higher rate of 50%. However, it is essential to seek professional advice before taking action, so please contact us for assistance.
Withdrawal of Child Benefit
A new income tax charge will apply to taxpayers who receive Child Benefit themselves or whose partner receives Child Benefit. The charge will only apply to those whose income is more than £50,000 for the tax year. If both partners have income of more than £50,000, the charge will apply only to the partner with the highest income.
For people with income between £50,000 and £60,000, the amount of the charge will be a proportion of the Child Benefit received. For those with income above £60,000, the amount of the charge will equal the amount of Child Benefit received.
This measure is due to come into effect from 7 January 2013.
Tax planning strategies
Again, where possible couples may want to equalise income to avoid or reduce their exposure to a Child Benefit tax charge.
Consider a salary sacrifice arrangement
Under salary sacrifice, an employee gives up the right to receive part of the cash pay due under his or her employment contract. This is usually done in exchange for benefits such as pension payments, childcare vouchers, company cars, cycles for work and car parking.
Those affected by the withdrawal of Child Benefit may want to consider sacrificing some of their salary, or increasing the amount they already sacrifice, to bring it below the £50,000 / £60,000 thresholds.
Increasing the amount you contribute into a pension may have similar benefits, whilst also helping you to prepare for a financially secure retirement.
Please contact us for expert advice on your circumstances.
Corporation tax cut
The Chancellor doubled the reduction in corporation tax in the Budget, bringing the main rate down to 24% in April 2012.
The rate will be further reduced to 23% for the financial year commencing 1 April 2013 and to 22% for the financial year commencing 1 April 2014.
Key planning strategies
Consider the timing of expenditure...
While there is often a tendency to delay incurring expenditure to save money or aid cash flow, this might not be the most tax-efficient option. By incurring expenses shortly before the year end rather than after, relief for those expenses is obtained 12 months earlier. With the main rate of corporation tax set to fall further over the coming years, incurring expenses earlier rather than later may also provide relief at a higher rate.
... and the timing of income
These days there is little scope for deferring sales as businesses must include in their turnover the sales value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed. Under current guidance it does not matter when invoices are raised and, apart from the requirement to take account of the time value of money and the risk of default, it certainly does not matter when amounts are actually received.
Changes to the EIS & VCTs
The employee limit for both the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) is now fewer than 250 employees (previously fewer than 50), while the gross asset limit has risen to £15m before the investment and £16m afterwards. The maximum annual amount that can be invested in a company has also increased to £5m and the maximum annual amount that an individual can invest under the EIS is now £1m.
Meanwhile, a new Seed Enterprise Investment Scheme (SEIS) offers income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and a cumulative investment limit for companies of £150,000. In addition, the scheme offers a capital gains tax 'holiday' for investments made.
Tax planning strategies
Review your investment strategy
Following the recent changes to both the EIS and VCTs, now could be the ideal time to review your investment strategy. Aimed at helping smaller riskier UK companies to compete for equity finance, the recent reforms may make this tax-favoured asset class much more attractive. If you are considering investing under either of these schemes, the changes could mean that you benefit from a considerable tax saving.
Smaller companies, meanwhile, may want to consider the possible benefits of the new SEIS. Please contact us if you wish to discuss this option in more detail.
Another contentious issue arising from this year's Budget was the proposed cap on income tax relief. Under the plans, a new cap was to be applied, from April 2013, on previously uncapped income tax reliefs to prevent individuals from claiming relief in excess of £50,000 (or 25% of their income if greater).
Yet with some philanthropists and charities suggesting that the measure could lead to a fall in charitable donations, the Government announced that it would launch a consultation on the issue. As a result of its ensuing conversations with charities, the Government has now announced that it will not be proceeding with the cap for charitable donations, although the cap for other reliefs is likely to go ahead.
We can advise you on tax-efficient charitable giving, including making the most of the reliefs available to you.
Please contact us for further assistance.
Please note that many of these measures are subject to state aid approval.
We can advise on how the Budget measures may affect you and your business, whilst suggesting strategies to minimise your tax liability and maximise any planning opportunities that may be available to you now.