So what will the Budget 2012 mean for you?
When the chancellor stood up in March there had already been a flood of commentary on the Budget in the media. You will all have seen the headlines and hopefully will have read our own Budget summary. Now we’ve had a chance to consider the detail we’ve highlighted below some of the things that will affect some or all of our clients and the opportunities we can help you with.
It is becoming essential to save income tax to ensure you and your spouse (and potentially your children) uses their income tax personal allowance and starting and basic rate tax bands.
Income can be legitimately shifted from you as a higher or additional rate paying spouse to a non, starting or basic rate taxpaying spouse without any Capital Gains Tax (CGT) or Inheritance Tax (IHT) issues.
If you are likely to be a higher rate taxpayer you could consider some or all of the following:
- Reducing taxable income by offsetting pension contributions against earned income. Where you have net income between £100,000 and £116,210 a part of that income will be taxed at 60%. A contribution to a registered pension plan could, in effect, provide tax relief at the same 60% rate.
- Making payments to Individual Savings Accounts (ISAs) so that underlying investment income can accrue without any additional tax.
- Considering investments such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts), that can be used to reduce your income tax liability.
It is now known that the additional rate of income tax will reduce to 45% from 6 April 2013, so there may be a benefit in maximising pension contributions over the next year when they qualify for 50% tax relief.
For small company owners there will continue to be merit in reinvesting into your business (rather than taking sums out by way of dividend or salary). The sums reinvested will have borne corporation tax only (possibly at the small profits rate of 20%) instead of income tax. On eventual sale up to £10 million of the capital gain will only be taxed at 10% due to entrepreneurs relief and then only at 28% for any gain above this.
National Insurance Contributions
The 1% increase in the NIC main rates that was effective from 6 April 2011 continues to make the legitimate planning of paying dividends rather than salary highly effective.
If your company is paying the main rate of corporation tax, we know the rate will reduce by a further 2% by 2014. If it is possible you may consider deferring taxable income until then and / or incur deductible expenditure now while the tax rate is higher.
Although rates have fallen, capital allowances will continue to be an important feature for businesses.
The budget each year leads to discussion about remuneration strategies but in practice there is often a limited amount of available cash in the business and this leads to conflict between expenditure now, and planning for the future, for instance on new equipment or making a pension contribution.
The flexible nature of some company pensions are therefore invaluable to today’s economic climate. These schemes allow a deductible pension contribution and then provide a loan back to the company thus freeing up cash and allowing further investment into equipment where an enhanced capital allowance may be available.
It’s not all about the tax
While it seems strange to us as accountants, you should remember that tax should not be the only or dominant factor in making decisions about expenditure or investment.
Relying on your business solely to provide future security for you and your family is an undiversified and high risk strategy. We do not advocate having all of your eggs in one basket and it is important to consider other methods of saving alongside your business, such as pensions and other suitable investments to diversify the risk should the success of your business not turn out as you thought it may.
Old Mill also helps business owners with the bigger picture. Time goes by quickly and you should give yourself as much time as possible to consider and implement succession planning, or planning when you intend to exit the business.