Newsletter March 2012

Our newsletter this month is the last before the March 2012 Budget. Our articles this month explain: who will be paying the highest rate of income tax this year, a few more ideas for reducing your income tax bill, clarification of VAT recovery on motoring costs and an update regarding HMRC's business record checks campaign.

Our next newsletter will be published 5 April 2012.

Who will pay the highest rate of income tax in 2011-12?

General considerations:

You will normally be paying tax at the 40% income tax rate if your income less tax allowances exceeds £35,000 and at the additional rate, 50%, on any of your taxable income that exceeds £150,000. There are special tax rates that apply to company dividend income.

Additionally, your Personal Allowance reduces when your income is above £100,000 - by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. As the basic personal allowance is £7,475 for 2011-12, when your income exceeds £114,950 this tax allowance is eliminated.

Income under £100,000

If your income is under £100,000 you should not lose any of your personal tax allowance and none of your top-sliced income will be taxed at 50%.

Income between £100,000 and £114,950

In this income range you are progressively losing a tax allowance and paying tax at 40% on the top sliced £14,950. The combined tax suffered is therefore a significant 60%.

Income over £150,000

Will all be taxed at 50%

Ironically, therefore, if you want to adopt strategies to reduce your taxable income, it is not those with income over £150,000 that stand to save tax at the highest rate. Instead it is those with income between £100,000 and £114,950 where the possible tax savings are at a rate of 60%.

Ideas for reducing your taxable income 2011-12

Before we describe a few basic ideas for reducing your taxable income this year it is worth pointing out that you only have until 5 April 2012 to take action...

Deferring income If you receive bonuses this month or a dividend from your company you should estimate your earnings for the next tax year, 2012-13, and if next year's earnings are likely to be lower than the current year's earnings consider deferring the voting of a dividend or bonus until after 5 April 2012. In this way you can defer any liability and possibly reduce your overall tax bill.

Gift Aid Payments Any Gift Aid payments you make in 2011-12 will effectively increase the amount of income you can earn at basic rate. For a higher rate tax payer (especially those with earnings of £100,000 to £114,950) this can significantly reduce the net cash cost of your donation. This strategy is particularly useful as, unlike the other ideas in this article, the deadline for making gift aid payments for 2011-12 is the date you file your 2012 self-assessment tax return – this is because such gift aid payments can be 'carried back' a year.

Self-employed tax payers and Companies As we mentioned in our newsletter last month, don't forget that from 6 April 2012 (1 April 2012 for companies) the Annual Investment Allowance (AIA) is dropping from £100,000 to £25,000. If you are contemplating a significant, capital purchase this summer that qualifies for the AIA, crunch the numbers and see if it would make sense to bring forward the expenditure, to before 6 April 2012 (1 April 2012 if a limited company).

Furnished Holiday Let Property If part of your income for 2011-12 arises from the letting of furnished holiday let property it may be possible to reduce or eliminate this income by taking advantage of the Annual Investment Allowance mentioned above. This type of property letting is considered to be a trade so qualifying expenditure on refitting or refurbishing your property could be brought forward to this month and used to eliminate higher rate tax.

Pension payments Have you maximised the amount you can pay into qualifying pension schemes this year? Although basic rate tax relief is generally deducted before you pay your contributions you can claim for the higher rate tax element on your tax return. Talk to your pension's advisor about a possible top up.

Hopefully you will already have given serious consideration to these and other ideas to minimise your tax position for the current tax year. You still have a few weeks to fine tune your planning. As soon as midnight passes on 5 April 2012 these options, apart from the gift aid strategy, will cease to be effective. The clock is ticking.

Motor expenses and VAT
Most VAT registered traders will be aware that you cannot reclaim the VAT when you buy a car. The only exceptions are businesses that use cars directly to generate income: for example a taxi firm.

The VAT position of motor expenses for cars owned by the business is slightly more complex.

As most business cars are used for private as well as business purposes you are only entitled to effectively claim back the VAT on the business use. Registered traders therefore have four choices:

  1. Reclaim all the input tax on fuel purchases and pay a car scale charge as output tax to HMRC to cover private use. The amount of the scale charge depends on the CO2 emissions of the vehicle.
  2. Keep mileage records that show business and private use and apportion your claim for input tax on fuel.
  3. Rather than the apportionment method (2 above) it is possible to use HMRC's published fuel rates per mile to calculate the VAT input tax included in fuel costs. To do this multiply business mileage by the appropriate fuel mileage rate and apply the VAT fraction (1/6).
  4. Elect to make no claim to recover input tax on all fuel for mixed use vehicles. You would do this if the output tax scale charge at 1 above is more than the input tax recoverable or if you don't keep the mileage records as set out in 2 above. Please note that if you choose this option you must apply it to all vehicles (including commercial vehicles).

Car repairs and servicing
As long as the car is owned by the business and the costs are paid for by the business all the input tax can be recovered. The only exception if is a car is never used for business purposes in which case no VAT can be reclaimed.

HMRC backs off business record checks
You may have read in the financial press that HMRC have recently backed away from their aggressive business record checking campaign. However, this particular issue is likely to reappear after 5 April 2012, albeit with a 'softer' face.

For the time being HMRC are consulting with professional bodies and interested parties to come up with a 'son of business records checks' campaign.

From the results they have produced thus far the expected haul of badly prepared business records has failed to materialise but it is unlikely that HMRC will relax their vigilance in this area completely. We will advise you of the scope of the new scheme as soon as details are published.

Tax Diary March/April 2012

1 March 2012 - Due date for corporation tax due for the year ended 31 May 2011.

19 March 2012 - PAYE and NIC deductions due for month ended 5 March 2012. (If you pay your tax electronically the due date is 22 March 2012).

19 March 2012 - Filing deadline for the CIS300 monthly return for the month ended 5 March 2012.

19 March 2012 - CIS tax deducted for the month ended 5 March 2012 is payable by today.

1 April 2012 - Due date for corporation tax due for the year ended 30 June 2011.

19 April 2012 - PAYE and NIC deductions due for month ended 5 April 2012. (If you pay your tax electronically the due date is 22 April 2012).

19 April 2012 - Filing deadline for the CIS300 monthly return for the month ended 5 April 2012.

19 April 2012 - CIS tax deducted for the month ended 5 April 2012 is payable by today.

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