Whilst basic rate income tax is being lowered, the small company rate of corporation tax is being increased.  The threshold at which higher rate tax is charged is being increased, which is good, but likewise the national insurance threshold is also being increased, meaning higher national insurance which costs more than the tax savings if you earn around the higher rate threshold (around £40,000 pa).  Capital gains tax business asset taper relief and indexation allowance are being abolished and replaced with a far less generous entreprenneurs' relief meaning that if you sell or close down your business, you are likely to pay more capital gains tax than previously.  Income shifting (where profits are split between say, husband and wife) is likely to be challenged, meaning far more administration and bureaucracy to prove that each person is "earning" their fair share of profits and dividends.  The entire capital allowance regime (claiming tax relief on the purchase of business equipment and vehicles) is completely re-written with better allowances for some and far worse for others.

It is virtually impossible to plan in advance as we don't know the "small print" and the new Chancellor is rapidly becoming known for his U-turns.  As always, please don't do anything significant without talking to us first.  It would be worthwhile you preparing yourself for taking important decisions quickly between 12 March and the end of the tax year 5 April when most of the changes will come into effect - that way, you can take prompt action in a very tight timescale.

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Individual Savings Accounts (ISA's) - It makes sense to invest any spare cash into an ISA where you get tax-free returns on your investments.  If you have only small amounts of spare cash or aren't interested in shares etc., get yourself a mini-cash ISA, offered by most High Street banks, though better rates of interest are available on internet and postal accounts.

Pension Contributions - Everyone is entitled to basic rate tax relief on pension contributions - for example, you could pay £2,808 into a stakeholder pension and the Govt top-it up with a further £792 of tax relief, meaning you have an investment worth £3,600 which only costs you £2,808.  For higher rate taxpayers, it is even better, that same £3,600 investment would have only cost you £2,160 because it also reduces your higher rate tax liability.  

Capital Gains Tax Annual Exemption - For 2007/8 you can make a capital gain on the sale of "investments" (i.e. property, shares, etc), of up to £9,200 without paying any capital gains tax.  If you can, it makes sense to sell some assets to use up this annual exemption.  If, for example, you have shares in several companies, you should consider selling a few each tax year to utilise your annual exemption - otherwise if you sold them all in a single tax year, you'd only have one year's worth of exemption and probably pay a lot more tax.

Capital Gains Tax Taper Relief and Indexation - Taper relief and indexation are likely to be abolished on 6 April 2008.  Any entitlements you have built up over the past year will immediately be lost.  Losers are likely to be those with "business assets" and those who have owned assets for many years.  Winners are likely to be those with "non business assets" i.e. buy-to-lets and second homes.  So, if you have business assets or assets owned for a long time, it is probably best to sell them before 5 April 2008.  Entreprenneurs' relief which was suggested by the Chancellor following the outcry at his penalising of the smallest businesses is not as valuable as the old business asset taper relief so can't be relied upon to replace the benefits of the old regime.

Basic Rate Tax Band -  If you operate through your own private limited company, you need to consider paying more dividends from the company to yourself, to make sure that your personal income is raised to just below the higher rate tax threshold.  As you know, the payment of a dividend doesn't affect the company's tax bill, and neither does it create a personal tax bill unless it takes the personal income into the higher rate tax band.  There is absolutely nothing to lose in paying an extra dividend just before the tax year end to use up your personal basic rate tax band.  Spreading dividends over two or more tax years is likely to cost less in personal tax than paying too much dividend in a single year, pushing you into higher rate tax.

Husband and Wife - If "income shifting" legislation is brought in as planned, it may well be the end of the situation where a non-working spouse can be allocated business profits or dividends.  This effectively means all the income is taxed on the main-earner, leading to loss of the non-working spouse's tax-free allowance and basic rate tax band, leading to higher tax and national insurance.  The recent "Arctic Systems" case effectively allowed the process where this could happen, so there is a window of opportunity, or a last chance, before the new rules are brought in (likely to be 6 April), to pay profits or dividends to such a non-working spouse.  

Wages to Spouse and Family - Every UK resident has a tax-free income allowance of £5,225 for 2007/8 meaning they can earn this amount without paying tax.  Wages paid by a business are a tax-deductable expense in the business accounts and tax return.  Paying your spouse a wage of £5,225 would cost them nothing, but could save up to £2,000 in tax and NIC.  So if your spouse and say elder child work for the business, you should consider employing them officially, paying them a market rate wage - it costs them nothing!  Just be careful to make sure that you can prove the hours they work, the type of work they do, and that you actually pay the wage to them and register as an employer, submitting payroll returns to confirm their wages.

Tax Credits - Not really part of normal tax planning as they are state benefits rather than taxation (despite the name), these are still worth considering.  Our long-standing recommendation is for everyone to apply for tax credits, whether or not they are eligible.  A new claim can only be back-dated for 3 months, whereas a claim made, say a year ago, resulting in no entitlement, can be reconsidered and an award back-dated for a full year if your income drops suddenly.  Furthermore, a drop in income for tax credits can be "engineered", i.e. by the payment of pension contributions (which are a deduction from income), or a sole trader spending money on business equipment or vehicles (which reduce business profits and therefore income).  A sudden drop in income triggers higher tax credits, but the best thing is that when the income increases again the following year, as long as not by more than £25,000, the tax credits for the second year are still based on the lower income year, meaning you get two years' worth of tax credits based on the lower income year.  For, say, a sole trader with two children, earning say £20,000, it is quite possible that the purchase of a piece of business equipment or a business van can be financed fully by increased tax credits and reduced income tax and national insurance, costing the sole trader virtually nothing!  The calculations are complex and not everyone can benefit, but it is certainly something worth looking at for anyone with a family income of under say £30,000 with dependant children.

These are just a few of the popular ways of saving tax that we believe are appropriate to our average client.  Those with higher than average incomes, or more specialist investments, should seek proper personal advice tailored to their circumstances.

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Buying Business Equipment or Vehicles - The general rule has always been to buy business equipment and vehicles just before a year end, rather than delaying to just afterwards, so that you get your tax relief in the earliest period possible.  With the introduction of the new capital allowances rules for the smallest businesses, this year alone, there is a different plan.  Buying equipment before 5/4/08 will give you a first year allowance of 50% of the cost whereas buying it after 5/4/08 will give you an initial allowance of 100% of the cost, deducted from profits.  So, basically, you should delay buying business equipment or vehicles until the new tax year, so that you'll get all the cost deducted from profits, albeit that it will be in a later period - i.e. tax relief would be delayed but worth more!  There are some exceptions outlined in the section below.

Selling Business Equipment or Vehicles - Generally it continues to be best to delay the sale until the new business year, so that tax on the proceeds of sale is delayed into the next year.

Business Expenses - It makes sense to spend money on business expenses before the end of the  business year, so that the tax relief on the expense attracts tax relief sooner rather than later.  Some examples would be repairs to business equipment or buildings, an advertising campaign, etc.

Income and Sales - As accounts and tax are based on the dates when the work was done or the sale was made, rather than invoice or payment dates, you can't delay tax by putting a later date on an invoice or delaying invoicing until the new business year.  What you may be able to do is actually delay performing the work or the sale, subject to your customer or client being in agreement.  Towards the end of the year, it makes sense to delay whatever work and sales you can until the start of the new business year.

Wages to Spouse and Family - Every UK resident has a tax-free income allowance of £5,225 for 2007/8 meaning they can earn this amount without paying tax.  Wages paid by a business are a tax-deductable expense in the business accounts and tax return.  Paying your spouse a wage of £5,225 would cost them nothing, but could save up to £2,000 in tax and NIC.  So if your spouse and say elder child work for the business, you should consider employing them officially, paying them a market rate wage - it costs them nothing!  Just be careful to make sure that you can prove the hours they work, the type of work they do, and that you actually pay the wage to them and register as an employer, submitting payroll returns to confirm their wages.

Pension Contributions - If you have a limited company, or employ your spouse or relatives, the business can make employer contributions on behalf of the director or employee.  Such contributions would be a valid deduction in the business accounts, thus attracting tax relief, and with tax relief given by the Government, the investment would be higher than the cost.  Again, the employee must be working sufficient hours to justify the payments.

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1. The 100% initial allowance is only available up to £50,000 of spending on business equipment and vehicles - any excess over £50,000 only attracts a reduced writing down allowance of 20%.  This is detrimental to any business that spends more than £50,000 p.a. on business equipment and vehicles.

2. The £50,000 p.a. is "pro-rata" so if your accounting period is less than a year, this limit reduces accordingly.  For a business year which straddles 6 April 2008, this is of particular concern.  If, for example, you had a business year end of 30 June, your £50,000 limit would be reduced to just £12,500 for the year end 30 June 2008 as there were only 3 months between the new regime being introduced and the year end (3/12ths of £50,000).

3. Cars are excluded from the new 100% allowance and only attract a 20% writing down allowance, meaning that the time taken to get relief on the purchase of a car will be far longer.

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The building we are in is an old converted barn, over 200 years old, and had previously been converted into the village fire station and then the Nat West bank.  Our offices had become "tired" to say the least, so needed a makeover and some structural alterations to keep it habitable for years to come.

Unfortunately, despite our best efforts at planning the work to cause the least disruption to our business and clients, there have been delays and communications problems over the past few weeks, which meant that we had to vacate our offices for longer than we had hoped and that we were without telephone and email services despite our best efforts to make sure that they would always be working.  

We can only apologise if you were inconvenienced in any way and if we were difficult to contact at some times.  As far as we are aware, we have responded to everyone who left messages, but if you were expecting anything from us and are still waiting please get back in touch and we will sort it out immediately. 

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