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.

Umesh Modi examines 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	£10,500
Born before 6 April 1938	£10,660

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.

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 such action.

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.

 

This article is based on current legislation and is of general interest only. Specific professional advice should be taken before acting on matters mentioned here.

 

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