Year-end tax planning is important especially if you run your own business or you are a top rate tax payer.
Here are our simple year-end tax planning tips for personal tax.
Year-end tax planning tip 1 : Personal tax allowance
The personal allowance for the 2011-12 tax year is £7,475 and any personal tax allowance that is unused at the end of the tax year cannot be carried forward so ensure as far as possible that the allowance is fully utilised, some ideas on how to do this are given below.
Children also have a personal allowance so if you employ any of your children in your business you can pay wages, utilise their personal allowance and claim a deduction against your business tax.
Year-end tax planing tip 2 : ISAs
Make use of your ISA limit. £10,680 can be invested of which £5,340 can be invested in a cash ISA.
Year-end tax planing tip 3 : Joint ownership of income generating assets
Couple can own an asset jointly and it is assumed that the income from the asset is split 50:50 but if this does not suit your requirements then a notification can be sent to HMRC to split the income based on the capital ownership. You can only take advantage of this option if you are married or in a civil partnership and the asset must be jointly owned.
Year-end tax planning tip 4 : Transferring assets
If you would like your spouse or civil partner to take all the income from an asset then it is necessary to transfer the asset into their name. Any such transfer will be free of capital gains or inheritance taxes but you may want to consider your estate planning before transferring assets for income tax purposes.
Year-end tax planning tip 5 : Jointly owned businesses
Dividends can be paid to all the ordinary shareholders including non-working shareholders such as spouses or partners.
Salaries can also be paid from the business with a deduction against profits, the salary must be appropriate for the services provided and so should be no more than would be paid to a non-family member for doing the same work. A salary of up to £7,000 can be paid without employee or employer’s national insurance or PAYE but the salary will need to be reported on the end of year P35. A salary of this amount would also qualify as one year’s contribution to state pension.
A spouse or civil partner who is also a business partner in a partnership and take out a profit share and if that person is not working then no national insurance needs to be paid; so called sleeping partners.
Year-end tax planning tip 6 : Pension contributions
A pension contribution of £50,000 can be paid in the current year plus a further £150,000 depending on the level of the pensions paid in the past three years. The pension can be paid by the individual but if you are an active in the business the business/company can make the payment for you and this will benefit from national insurance savings. This can also be done as part of a salary sacrifice scheme for all employees.
Consider making use of the £3,600 pension contribution allowance you can pay for someone else such as your spouse or children even if they do not pay tax. Basic rate tax relief is still available on those contributions.
The lifetime allowance of £1.8m reduces to £1.5m with the new tax year. If you expect your pension “pot” to exceed £1.5m by the time you finish working you can apply for fixed protection to retain the £1.8m providing no more contributions are made. The application to “fix” your pension pot must be made by 5 April 2012.
Year-end tax planning tip 7 : Charitable donations
Charitable donations could take you out of the 50% tax band or below the personal allowance reduction threshold and save you tax.
Further articles in this series covering business tax planning, investment tax planning, capital tax planning and offshore tax planning will follow shortly.