Last-minute tax saving tips
It's now less than a month to the end of the tax year (5th April).
There are always a few things you can do to save a bit of tax*, and perhaps that's more important than ever this year.
Why this year more than any other?
With a general election just over the horizon, tax regimes could be changing. The Conservatives, for example, have promised to drop the rate of corporation tax back to 20% for small businesses and 25% for large ones, if they're elected.
Sounds good! But where's the money coming from?
That's the possible sting in the tail. Some accountants think, after hearing George Osborne interviewed by Andrew Marr, that the Conservatives would get rid of the £50,000 Annual Investment Allowance in order to fund the tax cut.
If you're going to buy a business asset - buy it now
So if you're planning to buy a new computer for your business, buy it before 5th April, or 31st March if your business is a limited company. (I'd have liked to have said "an iPad" but sadly they won't be out in the UK by then.)
Then, not only will you get tax relief on that asset a year earlier, but AIA will still be with us!
AIA isn't available for all business assets, though - most notably, you can't claim AIA on cars.
If your business is at risk of breaking the £50,000 AIA limit, and you think it'll do the same next year, you'd still be advised to buy any new assets before 5th April / 31st March.
Because in this tax year, there's a 40% first year allowance available on most business assets when the £50,000 AIA is used up.
The current position is that this first year allowance will stop on 6th April 2010, or 1st April 2010 for companies, and you'll only get writing down allowance of 20% if you go over the £50,000 AIA.
So if you're going to buy a business asset, then you'd be well advised to think about buying it this month!
Beware the hire purchase sting in the tail though. If you buy an asset on hire purchase, it's treated as being eligible for capital allowances only when the business actually starts using it - not when the agreement is signed.
Other business costs - stop putting them off
Getting tax relief a year earlier could also hold true for other business expenses.
If, for example, you've been thinking, "I really must get some new letterheads printed", you're a sole trader and your business's year end coincides with the tax year - then grab your logo .jpg and get down to the printer's before 5th April!
Remember, expenses go into your business accounts when they're incurred, not when you pay for them - so even if you don't pay the printer till 6th April, so long as (s)he did the work before 5th April and you have an invoice, you should be OK to put that expense into your accounts.
Income - don't be tempted to hold it back
It's tempting to wait until 6th April to invoice your customer for some work done, so that this income goes into your next tax year and you pay tax on it a year later.
HMRC are wise to that trick, though!
If you do the work before the end of the tax year, you need to accrue that income, i.e. count it as income of the tax year in which you did the work.
High earners - bring income forward!
What, pay tax sooner?!
Yes, because it'll save you tax in the long run. If your income is over £100,000 a year, then you'll get less personal allowance as from 6th April 2010 - because the personal allowance is going to be reduced by £1 for every £2 your income goes over £100,000. You'll also have to file a tax return.
So if that's you, and you can declare a dividend, or pay a bonus, before 5th April instead of after, consider doing that!
If you're going to sell a personal asset - wait!
Conversely though, if you're planning to sell an asset that would give rise to capital gains tax, you could be advised to wait until after the end of the tax year if you can. Then you'll pay the capital gains tax a year later!
But it might not be the best idea to wait if you're planning to sell a lot more assets next year.
Because each year, every individual gets an annual exemption that we can set against capital gains. In 2009/10 that's £10,100.
That can't be carried forward to the next tax year if you don't use it. Use it or lose it!
So if you're going to be selling a lot of assets that give rise to capital gains tax in the near future, you may opt to spread the sales between two tax years instead (for example, sell some in March and some in May), to make best use of your annual exemptions. Although you may pay tax sooner, you'll pay less tax overall if you do that.
Timing of dividends
If you're a shareholder/director of a limited company, depending on what other income you have (beware if you're a higher earner, see above), you might want to consider having the company declare a dividend on 6th April instead of before that date.
This could save you some tax, or at least mean you would pay tax on the dividend a year later, depending on your income level.
As well as the reduction in personal allowance for income over £100,000, beware of the new 50% "super tax" rate coming in on 6th April 2010 for income over £150,000. If you suspect a big dividend will push you over that limit, you might want to pay the dividend before 5th April!
Make use of government-backed schemes
Mr Darling does (sometimes) hand out tax relief on a plate, so it makes sense not to drop that plate on your foot.
For one thing, that'd hurt. For another, you'd be handing him the money back on a plate.
So unless you don't mind that, here are a few points to bear in mind.
- If you're looking to put some money aside, consider investing what you can of this year's allowance in an ISA, because this year's allowance will be lost on 5th April**.
- Alternatively, if you're aged between 16 and 74, you can invest up to £25 a month in tax-exempt savings policies issued by friendly societies.
- Consider putting money into a pension, to get tax relief. Watch out for the government's anti-forestalling provisions, though, which can bite if you're a high-earning individual and contributing more to a pension scheme than you normally do.
- If you want to invest in someone else's business, consider investing in a Venture Capital Trust or in Enterprise Investment Scheme shares.
From 1st April 2010, if you pay your VAT by cheque, HMRC will treat that VAT as paid on the day the cheque clears into their account - NOT on the day they receive the cheque.
So make sure you send off your VAT cheques in good time so that HMRC can bank them in time for them to clear.
Or, better still, consider paying electronically, which you have to do anyway if you file your VAT returns online!
* Remember that HMRC do charge penalties if they catch you deliberately and illegally understating your tax bill. So always be careful when you're planning to save tax and make sure you're doing it legally and ethically.
All the suggestions in this article are legally and ethically sound (as you'd expect).
** That's £5,200 (of which £3,600 can be in a cash ISA) if you're under 50, or £10,200 (of which £5,100 can be in a cash ISA) if you're over 50.
Disclaimer: As ever, the article above is only for general guidance and is no substitute for taking professional advice from your accountant or financial adviser.
- How to save on gas and electricity bills when you work from home
- 4 business lessons to learn from Queen
- Zombie companies: how to know if your business is walking dead
- Autumn Budget 2018: what's in store for small businesses?
- 5 simple mind tricks to help get your invoices paid on time