As the end of the 2011/12 tax year draws nearer, this is a good time to review your tax position and take advantage of tax planning opportunities.

Tax Rates

For 2011/12, the 20% tax rate applies to taxable income of up to £35,000; income from £35,000 to £150,000 is taxed at 40% and income above £150,000 is taxed at 50% (dividend income is taxed at slightly different rates – 32.5% instead of 40% and 42.5% instead of 50%).

If you have a limited company and are considering drawing additional remuneration or dividends from the company, then you may want to base the decision as to whether to draw that income either before or after the end of the current tax year depending on the amount of income you have already drawn and therefore on what tax rate will apply to any further income. Determining the best timing – before or after 5 April 2012 – may enable you to utilise your basic rate band or avoid the 50% tax band.

Capital expenditure

The Annual Investment Allowance (AIA) currently stands at £100,000 per annum but will fall to £25,000 with effect from 1 April 2012 (for companies) or 5 April 2012 (for individuals and partnerships). The AIA provides 100% tax relief for capital expenditure qualifying for plant and machinery capital allowances up to the stated limit.

The timing of capital expenditure may therefore have a significant impact on your tax position so if you are considering further capital expenditure in the next couple of months, points to bear in mind are:

• Have you already utilised your £100,000 AIA for 2011/12? If so, consider delaying the expenditure until after 5 April 2012, if the expenditure is £25,000 or less
• If you have not utilised your AIA in 2011/12 and are planning significant capital expenditure, incurring the expenditure before 5 April 2012 (or 1 April 2012 as appropriate) will ensure the higher level of AIA

Pension contributions

There is no limit on the contributions that can be made by or on behalf of an individual into a pension scheme, although the amount of contributions on which tax relief can be obtained is restricted to the higher of 100% of relevant earnings and £3,600 (gross). Relief is available at the higher and top rates of income tax – the planned withdrawal of higher-rate income tax relief on pension contributions with effect from 6 April 2011 having been scrapped. However, if total contributions (made by the individual, the employer and anyone else on the individual’s behalf) exceed the “annual allowance”, £50,000 for 2011/12, a tax charge arises on the individual at 40% on the excess contributions.

Other year-end thoughts

ISAs: no income tax is payable on any income from the ISA investments. The maximum amount you can invest in 2011/12 is £10,680, of which up to £5,340 can be in a Cash ISA with the rest in a Stocks and Shares ISA. If you have not already done so, therefore, you may want to consider opening an ISA before 5 April 2012 to utilise this year’s maximum.

Enterprise Investment Scheme (EIS): income tax relief at 20% is available for investment of up to £500,000 in shares which qualify under the EIS; the conditions for the relief are complex, both for the investor and for the issuing company. Gains made on the disposal of EIS shares are tax-free as long as various conditions are met.

Similar reliefs to the EIS are available for investment in a Venture Capital Trust (VCT).

The Chancellor’s Autumn Statement announced plans to increase the maximum annual investment under the EIS to £1m from 2012/13 and to relax some of the conditions that have to be met by companies wishing to qualify under the EIS…

Annual exemption for capital gains tax: the annual exemption for CGT stands at £10,600 for 2011/12, so gains of up to this amount are exempt from CGT. If you have not made gains to utilise your exemption, you may wish to consider if you are able to do so before 5 April 2012.

Annual exemption for inheritance tax: a gift of up to £3,000 per year is exempt from IHT, thus reducing your estate and potentially saving IHT of £1,200. The exemption can be carried forward for one year, so if you did not use your exemption in 2010/11 you can make a gift of up to £6,000 in 2011/12, a potential IHT saving of £2,400.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk