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Tax Planning 2008-09

The recession has started to affect most people in this tax year, but there are still some things that you can do to ensure you maximise the tax breaks on offer, giving you and your business the best possible chance of survival.

Income Tax

You may be able to save income tax by switching income from one partner to another. The aim should be to each use up your personal tax free allowance (£6,035 2008/09) and minimise any higher rate tax liability.

By transferring income bearing investments to your spouse, you may be able to minimise your tax liabilities. So long as transfers are made between husband and wife, or civil partners, then this should not give rise to a liability to capital gains tax.

With such low interest rates, such changes may not make significant impact on your taxation position. Perhaps you are in business as a sole trader, but your spouse helps in the business too. By transferring to a partnership you may be able to split the profits between you – this need not be a 50:50 split.

Running your own business?

If you trade through a limited company you probably take a low salary and the balance of your income as dividends. You may wish to consider paying your spouse a salary too, in proportion to his or her input into the business. By paying a salary of between £390-£453 a month in 08-09, you will make sure that entitlement to state benefits is maintained. Gross salary is also allowable as a deduction in your company’s accounts.

If you do trade through a company, make sure that you maximise your personal income by voting dividends before 5th April 2009, to use up your basic rate tax band. Dividends are generally paid in proportion to the number of shares held and this may include shares held by a partner or spouse.

If you are both employed and self-employed you could be paying excessive National Insurance contributions. You may be entitled to defer the NI payments due through your self-employment, but this should be done before 5 April 2009.

The 2008 budget changed the capital allowance system, so that businesses can benefit from immediate relief on purchases of capital items up to £50,000 a year. If you intend to make a large capital purchase and have not used your allowance, it may be worth doing so before 5th April 2009 to claim the relief in this tax year. Alternatively if you have already used this £50,000 allowance you should consider delaying further capital purchases until 6th April 2009.

The Government’s low emission car scheme has been extended. This means that a 100% capital allowance can be claimed on a new car purchased before 5 April 2009, with an emission of below 110g/km, restricted for any personal use.

At the other end of the emission scale, tax relief will be restricted on cars with emissions over 160g/km from 6 April 2009, so you may want to make a purchase of a larger vehicle before this date to maximise your tax allowances.

Pensions

The increasingly generous tax allowances available for pension contributions make them worth considering in 2008/09.

Assuming you earn more than £3,600, you are entitled to make a personal contribution up to the amount of your earnings (capped at £235,000 in 08/09). Note that for the purpose of calculating your income, dividends are not classed as earnings.

It could be worth your company making a contribution to your personal pension scheme, as it may be possible to deduct the contribution as an expense in your company’s accounts.

Investments

Investment income such as interest or dividends received from ISAs are tax free, as are capital gains arising from their sale. You can invest up to £3,600 in a cash ISA and £7,200 in a stocks and shares ISA, but the maximum combined investment is £7,200. If you don’t use your allowance for 2008/09, you lose it.

Capital Gains Tax (CGT)

In 2008/09 the first £9,600 of capital gains is tax free for most individuals. Any gains in excess of this amount are taxed at 18% in the 08/09 tax year. If you have used your CGT allowance and your spouse hasn’t, you may wish to transfer assets between you and your spouse, before disposing of any further assets.

Alternatively, you may have loss making assets, such as shares, that can be sold before the end of the tax year, using the loss to reduce any gains on other assets.

Remember that if the disposal of an asset creates a tax liability, your 08/09 CGT tax bill must be paid by 31 January 2010, along with your income tax. It is therefore worth considering delaying a major disposal until 6 April, as this will delay the payment of CGT by 12 months.

Inheritance Tax

For inheritance tax (IHT) purposes individuals benefit from a nil rate band of £312,000 in 2008/09. This must cover the value of the deceased person’s estate and the total of any gifts made in the previous seven years. It is now possible to transfer the unused portion of a spouse’s band and you should seek further advice if this affects you.

You may gift up to £3,000 in a tax year, without incurring an IHT liability. If you didn’t use this exemption in 2007/08, you can carry it forward to 2008/09, giving you a gift allowance of £6,000.

If you make regular gifts, they too may be exempt from IHT. You will need to ensure that you can prove your gift is being made out of your income, rather than your capital and if you think this applies to you, please ask for further advice.

If you have any particular questions or wish to discuss your tax planning options in more depth, please do get in touch.