A leading accountancy firm has published some simple tax planning ideas to help small business owners and contractors reduce their tax liabilities in future years.
The following tips are based on information provided by RSM Tenon this week.
Invest in a tax efficient way
ISAs are ‘an extremely efficient way of sheltering your savings and investments from tax’. The current allowance for the 2012/13 tax year is £11,280 in a stocks and shares ISA, and £5,640 in a cash ISA. In his 2012 Autumn Statement, the Chancellor announced that the limits would rise to £11,520 and £5,760 respectively from April 2013.
Timing when you draw down income
The firm recommends that limited company contractors and entrepreneurs stay aware of current tax bands, and where appropriate to pay a spouse or civil partner a ‘commercial salary’ from the company.
Limited company owners are also able to time when they declare dividends, providing tax planning opportunities to move income into forthcoming tax years to minimise their liabilities to higher rate or additional rate (50%) tax.
Lower tax on capital gains
If possible, extract income from your company in the most tax-efficient way possible. As Capital Gains Tax rates are significantly lower than the higher and additional income tax rates, company owners may have the ability to ‘extract the wealth out of their business in the form of capital (i.e. shares) rather than income, especially if the income is surplus to current requirements.’
If you have owned the shares in your company for over a year, you may be able to claim Entrepreneurs Relief if you decide to sell the company, or a percentage of the shares in the future. You only pay CGT at the rate of 10% if you are eligible to do so.
The accountancy firm says that the Inheritance Tax (IHT) threshold is unlikely to rise any time soon, and has been frozen at £325,000 since April 2009. ‘There are many planning ideas and IHT efficient structures and products in the market place which can mitigate the burden.’ You can find out more in Company Bug’s guide to Inheritance Tax.
The Chancellor has cut the tax relief on pension contributions from £50,000 during the current, and next tax year, to £40,000 from April 2014. The lifetime allowance will also be cut from £1.5m to £1.25m at the same time. Unsurprisingly, RSM Tenon advises contractors to maximise their contributions during the next two tax years, where possible. Find out more about the future changes to pensions contributions here.