Posted by Nick Day on 15 Mar 2013
Top 12 Year End Tax Planning Tips for 2013
With the end of the UK tax year (5 April) looming in to view and the UK Budget set for 20 March, it is time to consider various year end planning that might make a difference in reducing your tax liabilities.
Issues to consider with Year End Tax Planning
Issues to consider include but are not limited to:
Ensuring each spouse uses their full Personal Allowance for income tax purposes where possible. Annual income of less than currently £8,105 is not liable to tax. Spouses/civil partners should consider the possible transfer of income producing assets to ensure that Personal Allowances are not wasted.
If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free Personal Allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to State Retirement Pension and other benefits is protected.
Minor children are entitled to Personal Allowances. There are restrictions on the amount of income that a child can derive from a parent but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions/national minimum wage issues are taken into account.
Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880. At the other end of the scale, the Annual Allowance (AA) for making tax-relievable pension contributions reduces to £45,000 from £50,000 on 6 April 2013, so consideration should be made to utilising the full £50,000 AA for 2012-13 by 5 April 2013. It is also possible to carry forward unused AAs from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions well in excess of £50,000 with a little planning.
The use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) should be reviewed. Up to £11,280 per person could be invested in an ISA for the 2012-13 year.
Timing of income – taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income, employment bonuses etc., and also to the timing of the payment of dividends paid out by family owned companies. Similarly, the acceleration of expenditure on business expenses/capital assets qualifying for capital allowances could prove beneficial. The top rate of UK income tax reduces to 45% from 50% on 6 April 2013 so deferral of income such as employment bonuses to after 5 April may well save tax, but the deferral has to be implemented properly.
Taxable income of between £100,000 and £116,210 is effectively taxed at a rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £116,210. Deferral of income may therefore save tax at the rate of 60% although planning might also include the use of additional pension contributions, charitable donations, etc.
Employers should review benefits provided to employees to ensure they are delivered in a tax-effective manner. Cars are taxed by reference to their retail list prices and carbon dioxide emission levels, and a review of the way cars/private petrol are provided could produce tax and National Insurance savings. HM Revenue & Customs has recently confirmed that “smartphones” qualify as “mobile phones” and can be provided to employees on a tax-free basis. Refunds for previous years may be due.
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Businesses should review whether a change of accounting date might prove beneficial. Early profits of a business may be taxed twice, with “overlap relief” not due to be claimed until the business ceases. If an accounting date is chosen that is later in the tax year, this can reduce the overlap period and release relief that is not otherwise index-linked. Benefits may be significant if the trend is towards a decline in profits.
Capital gains tax – consideration should be given to utilising the tax-free Annual Exemption (currently £10,600). Each spouse/civil partner is entitled to the exemption each year so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash-flow benefits in terms of when tax needs to be paid. “Bed and breakfasting” to increase the base acquisition costs of shares is no longer tax-effective where shares are sold and re-purchased shortly afterwards (unless you are non-resident, when the rules do not apply), but planning with spouses/civil partners buying back the shares may still be tax-effective.
Click here for more on Capital Gains Tax planning.
Inheritance Tax – the use/carry forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income, and tax-free gifts in consideration of marriage, which can range between £1,000 and £5,000 depending on the relationship with the person getting married.
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Expatriates – there are always a number of factors for “expats” to consider – whether this relates to non-domiciled individuals living/working in the UK or Brits leaving the UK and seeking to establish non-residence status.
You can click here for more detailed information on Expatriates but in summary possible year end planning issues include:
- Reviewing the impact of the new Statutory Residence Test that becomes effective from 6 April 2013 onwards.
- Reviewing whether “non-doms” should file on the Arising or Remittance Basis for 2013-13, and if tax resident in the UK for several years, whether the Remittance Basis Charge should be paid.
- For expats who have arrived to work in the UK for 2 to 3 years, and who may benefit from “Overseas Work Days Relief”, whether a fresh compliant offshore account should be opened to receive salary after 5 April 2013.
- Inheritance Tax (IHT). If you are non-domiciled and have been UK tax resident in any part of 17 out of the previous 20 UK tax years, you will become deemed-domiciled in the UK for IHT purposes, meaning that both UK and non-UK assets are liable to IHT. If you are to become deemed domiciled in the UK from 6 April 2013 you should consider taking planning action before this date.
- Another IHT point for non-doms is that transfers between UK domiciled spouses are exempt from IHT, but transfers from a UK dom to a non-dom spouse are exempt only up to £55,000. New rules are set to be introduced from 6 April 2013 which relax the rules considerably so depending on the detail of the new rules (hopefully to be confirmed in the Budget) it might be worth waiting until after 5 April 2013 before making transfers.
- “Business Investment Relief” is a way for non-doms to bring funds to the UK that would otherwise be taxed on the Remittance Basis, by investing them in a qualifying UK trade (which can be their own UK trading company). The tax otherwise payable on taxable remittances would be 50% prior to 5 April 2013.
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