THE tax year-end is fast approaching and now is an ideal time to re-review your financial affairs to ensure that they are as tax-efficient as possible.
This is particularly important as the new tax year will see already announced tax increases and possibly a change in Government, which could bring in yet more tax changes.
As you are probably aware, the top rate of income tax will rise to 50% from April 6, 2010. This only applies to individuals with taxable income in excess of £150,000. For many, though, the highest tax rate will remain at 40%.
The tax-free personal allowance will remain at £6,475 for 2010/11. Furthermore, for those with income over £100,000 this allowance will taper away and will be reduced to nil where an individual’s income exceeds £112,950. Due to the interaction of the thresholds and tax rates, marginal rates of tax could be as high as 60% and for those affected, it is important to consider how such tax rates can be mitigated.
There are particular opportunities for business-owners including:
l Advancing bonus/dividend payments into this tax year to lock into a maximum income tax rate of 40%
l Taking loans from the family company after April 5, 2010, in lieu of bonuses/dividends to reduce taxable income
l Structuring tax-efficient share schemes to convert income into capital
l“Re-starting” profitable consultancy companies to extract retained profits at lower capital gains tax rates
l Introducing corporate partners into family partnerships to shelter income at lower company rates of tax
l Incorporating profitable sole trader and partnership businesses
l Switching to a fiscal financial year-end for certain unincorporated businesses
Married couples and civil partners have a few additional tax-saving options. Where possible, they should ensure that they both utilise their personal allowances and lower-rate tax bands. As transfers of assets between them are free of all taxes they may be able to arrange their assets, such as bank accounts, share holdings, efficiently to mitigate the extent of any higher rate tax liabilities.
Where a sale of a capital asset is contemplated and a gain will be made consideration should be given to transferring an interest to the spouse so that two capital gains tax annual exemptions (£10,100 for 2009/10) can be utilised rather than one.
Charitable Gift Aid donations should also be made by the spouse who is the highest rate taxpayer as they are able to obtain the optimum relief for these payments, without affecting the tax position of the charity.
Tax on savings income can also be mitigated by investing in ISAs. The amount most can invest for the current tax year is £7,200. This is set to rise to £10,200 from April 6, 2010. For those born before April 5, 1960 the limit is already £10,200.