Before the end of the tax year
The tax year 2010/11 ends on 5th April 2011 – which is only a couple of weeks away.
So if you want to save some tax by taking action before then, here’s some ideas for how you might do that!
(This article pre-dates the 2011 Budget but any changes mentioned here have already been announced by the government.)
Approaching changes to tax rates
In the current tax year, 2010/11 (that’s the tax year which runs from 6th April 2010 to 5th April 2011), assuming you’re under 65 you could earn a total of £43,875 from all sources before you started paying higher rate income tax at 40%.
That’s made up of the personal allowance* of £6,475, plus the basic rate tax band** of £37,400.
For 2011/12, so for the tax year that will start on 6th April 2011, the basic personal allowance will go up to £7,475.
But the government has given with one hand and taken away with the other!
The basic rate tax band will fall to £35,000 from 6th April 2011. So that means you can only earn £42,475 before you start paying higher rate tax.
That’s a shortfall of £1,400 – so if you have a chance of bringing some income forward, for example if you’re running a limited company and you’re planning to pay a dividend in the near future, from that company’s profits, you might be well advised to pay that dividend before 5th April 2011.
National Insurance rates
From 6th April 2011, National Insurance rates will all go up by 1%.
That means, if you’re employed by your own limited company, you will have employee’s National Insurance deducted at the rate of 12% instead of 11% - and the company will pay employer’s National Insurance at 13.8% instead of 12.8%.
So if you’re thinking of making a one-off benefit available to your staff in the near future on which your company would pay NIC, for example a party that doesn’t qualify for the benefit exemptions - say to celebrate winning a major new contract or moving to a new office – think of bringing that party forward and having it before 5th April 2011.
Bring day-to-day spending forward
If you're a sole trader and you prepare your accounts to the end of each tax year, and you're planning to spend some money in your business such as buying a new supply of ink-jet cartridges for your printer, do that before 5th April.
That’s because you’ll get the tax relief on those costs a year earlier if you buy them just before your year end, than just after!
If your business is a limited company which prepares accounts to 31st March each year, then the same would apply to you – buy your cartridges on 31st March and you save the tax a year earlier than if you’d bought them on 1st April.
For limited companies, there’s the added incentive that the corporation tax rate for small companies goes down on 1st April 2011, from 21% to 20%. So if you prepare accounts to 31st March each year, incurring a cost on 31st March will save you tax sooner, and save more of it!
Be careful though. If you are spending money for a specific event that isn’t going to happen until next tax year, for example a training course that you pay for in advance, then this cost would almost certainly have to go into next tax year.
Buy assets now!
If you’re thinking of buying a new piece of capital equipment for your business, remember you have an Annual Investment Allowance (AIA) of £100,000 to use up in the tax year 2010/11 – so you can spend up to £100,000 on most new assets in the tax year (or the year to 31st March if your business is a limited company) and get tax relief of 100% of the cost of those assets, straight away.
If you don’t spend your full AIA in the tax year, it’s lost – you can’t carry forward to the next year, any part of the allowance that you don’t use – so if you’re planning to buy new computers for all your staff, do it before 5th April (or 31st March for limited companies).
And that even fits in with the iPad 2 release date in the UK, which is 25th March. Equip your staff with brand new iPad 2s and get tax relief a year early? Sounds good to me!
The AIA will be cut to £25,000 a year from next tax year (1st / 6th April 2012). So if you’re planning on investing more than that on capital equipment for your business, do so before next April. For this year, though, you’re safe with the £100,000 limit.
Don’t try and postpone work income!
It’s tempting to issue invoices after the end of the tax year, assuming that’s also your business’s accounting year end, to postpone your income and pay tax on it a year later – but HMRC have seen that one before!
The rules say that the timing of when tax is due on the income depends on when the work was done – so if you did some work this month, don’t be tempted to wait until 6th April to invoice your customer, because you’d have to put the income in this year’s accounts anyway.
And don’t forget…
If you have an ISA, you can invest up to £10,200 (£5,100 in cash) for the tax year 2010/11, and the interest on that will be free of tax – but this has to be done before 5th April. Again, use it or lose it!
There are several ways in which you can plan your finances carefully to make the most of the legal and ethical ways available to save tax. If in doubt, as always, seek professional advice for your situation from an accountant.
*Everyone, except for people who earn over £100,000 a year, is entitled to earn a certain amount of money before they start paying tax, which is called the “personal allowance”. This goes up once you’re over 65 and again for the over-75s.
** This is the level of income, after the personal allowance has been taken off, at which the higher rate of 40% tax kicks in.
- Turning over a new leaf: tips for organising your bookkeeping in autumn
- MTD for Income Tax: next steps for sole traders
- Hack to the future: how hack days inspire creativity at FreeAgent
- Video: self-employed business expenses by HMRC
- Finance Bill 2017-19: Making Tax Digital back on the agenda