As we approach the end of the tax year it is advisable to review opportunities now and look at longer term planning for next year.
Shareholders and employees of family companies should consider whether dividends or bonuses are to be paid prior to 5 April 2014 or deferred. Where income exceeds £100,000 the personal allowance is reduced, so that if income is £118,880 or more there will be no allowance. Furthermore, if income exceeds £150,000 the excess is taxed at 45% (37.5% for dividends) rather than 40% (32.5% for dividends). For companies who do not pay regular dividends or bonuses it may be preferable to spread these over 2 tax years. Paying a dividend just after the end of the tax year defers the tax payment by 12 months. Where both spouses are shareholders it is worth ensuring sufficient income is received to use up the basic rate band, as this can keep the effective tax rate at nil. The needs and tax position of the company should be borne in mind.
Pension contributions may preserve the personal allowance or keep income within certain tax brackets. Higher rate tax relief is restricted to £50,000 of contributions, although unused relief from the previous 3 years can be counted. From next April, the higher rate relief falls to £40,000. Employers who pay directly into pension schemes for their employees avoid national insurance contributions and therefore an employee could reduce basic pay and increase employer contributions. Early planning is advised.
The annual investment allowance enables owner managed businesses to deduct 100% of the expenditure on capital assets from profits. From January 2013 the maximum expenditure is increased from £25,000 to £250,000 until 31 December 2014. The allowance then reverts to £25,000. Transitional rules can be complex but ensuring maximum use of the allowance will reduce the business’s tax liability.
From next April employees can receive a tax free loan of up to £10,000, which makes such loans attractive for season tickets but also to clear debts, for example. There are also other benefits which are tax free such as mobile phones, death in service life assurance, childcare vouchers and bicycles.
Many small businesses make use of the family home and often overlook the possibility of claiming tax relief on part of their home expenses. The claim can be either a flat rate for the use of the home, or a proportion of the household expenses including rent or mortgage interest, council tax, insurance, repairs and heat and light. Those trading through a company may need to set up a rental agreement and whilst it is important to maintain records, the deductions from income can be substantial.
With the top rate of income tax having fallen from 50% to 45% this year, it is important to consider whether the income tax payments due at the end of January should be reduced so tax is not paid sooner than necessary.
Finally, in recent years we have seen a gradual fall in the small profits rate of corporation tax to 20%. It is therefore an opportune time to review your existing business structure. Incorporation of a sole trade or partnership may offer tax savings and flexibility on the extraction of profits too.