Birmingham Post Article - February 2011

by Lucas Markou, partner at Solihull-based accountants and business advisors Jerroms LLP

Businesses have only a few weeks in the current tax year to take advantage of tax planning opportunities.

Most growing businesses can currently claim 100 per cent of that expenditure on plant and expenditure. Such expenditure can be written off against taxable income through the annual investment allowance.

It may be worth bringing the project forward to before April 5 in order to receive the tax relief as soon as possible.

In terms of returns for owner managers, this is the time to look at salaries, bonuses and dividends. For family owned businesses, it is still usually the case that the best deal is to pay reasonably low salaries and substancial dividends, leading to a saving in national insurance.

Where the husband or wife of the owner manager works in the business, there are opportunities to use his or her lower income tax rate bands through a combination of salary and dividend if the shareholding permits. Care has to be taken that such a salary is commercially justifiable.

Beyond this though, the 50 per cent income tax rate has brought a new tax planning challenge. Additional dividends can be paid this tax year so that director shareholders draw income up to the point where the 50 per cent would otherwise kick in and any sums not required by those concerned can immediately be lent back to the company without any tax penalty.

If an individual's income exceeds £100,000, personal allowances are gradually lost, meaning that the marginal rate on income above that level and below £112,950 is as high as 60 per cent. If the owner manager's income would otherwise be in that bracket, whether through dividend or salary, it is advisable to take action to reduce it to below the £100,000 level. One such option is an additional pension contribution, which can cut taxable income. Pension contributions could also be used to stop taxable income edging into the 50 per cent band.

In fact, pensions are still a good deal in tax terms, providing tax deductions to lower income tax bills while they build up a retirement nest egg. However, in the current tax year, there are restrictions on tax relief so that those earning over £150,000 receive tax relief at only 20 per cent rather than their 50 per cent tax rate, and there are restrictions on relief for those with incomes of over £130,000.

From April 6, 2011, taxpayers will be able to claim tax relief at their highest tax rate on annual contributions of up to £50,000 though there are restrictions linked to the total value of the fund.

The time to act is now. As with other aspects of tax planning, professional advice is needed.