Tax Q & A’s – Debbie’s monthly editorial

Q: My Company’s year-end is 31 March.  What should I consider before the year-end to reduce the amount of corporation tax I have to pay?

A: Here are a few suggestions to consider and things to watch out for:

  • Ensure that any necessary expenditure is incurred before the company’s year-end, to get relief for expenditure sooner rather than later.
  • If the business is seasonal, there may be an opportunity to get a one off reduction in the tax bill by changing the year end.
  • Tax relief is only available for pension premiums paid before the year, so make sure the instruction is done in time for the payment to be made.
  • Donations to charities must be paid before the year-end to qualify for relief.
  • If any redundancies are contemplated, to obtain a tax deduction for redundancy costs not yet incurred, redundancy notices should be issued before your year-end.

Q: ……and what should I consider for extracting the company profits?

Profit extraction is critically important to a business owner and needs to be discussed in detail with a qualified accountant, however consider increased pension contributions by the company and note that dividend payments are usually more tax efficient than bonuses.

Q: How much can I invest in plant and machinery and get full tax relief in the year it is purchased? Is it now £250,000?

A: The relief you are referring to is the Annual Investment Allowance (AIA) which increased from £25,000 to £250,000 on 1 January 2013.  Take care to note that the entitlement is pro-rated to your year-end and not simply £250,000.  For example, if your year-end is 31 March 2013 the maximum AIA entitlement is £81,250 (£25,000*3/4 + £250,000*1/4).  Also in relation to the part period falling before 1 January 2013, no more than a maximum of £25,000 of the company’s actual expenditure would be covered.

Q: I will earn £110k this tax year as an employee, any suggestions on how to reduce the amount of tax due?

A: Where income being received is around the £100,000 level care needs to be exercised to ensure that the effective 60% rate is not applicable because of the loss of personal allowances between £100,000 and £116,210. Pension contributions and gift aid contributions can be used, where appropriate, to reduce the income below the £100,000 threshold.

Q: With the announcement that the Inheritance Tax threshold will stay at £325k until 2019, what simple ways can I reduce the amount of tax that will be due on my estate when I die?

A: Lifetime gifts to reduce your taxable estate are a simple way to reduce tax liabilities. As long as you live for seven years after gifting, no inheritance tax will be due.  Some gifts are even exempt from the seven year provision – a pattern of regular gifts out of surplus income, an annual exemption of £250 each to any number of individuals, an overall annual exemption of £3,000 which may be carried forward by one year when not utilised in that year and certain gifts on the occasion of a family wedding.