Home > > 2009/10 Year end tax planning > Tax increases on the horizon – act now to save tax
Tax increases on the horizon – act now to save tax
While the effects of the recession on cash flow and business profitability are on the minds of many the pending tax year end on 5 April 2010 provides an opportunity to ensure that your liability for the 2009/10 tax year is no greater than necessary. With further tax increases on the horizon there really is no time like the present to take a step back and look at how you are managing your personal finances and your business, and consider how you might reduce your taxes and/or improve your financial and business strategies.
In this section we consider some of the ways you might act now to help achieve a more secure future for you, your family and your business. Please call us now to discuss your specific situation and the planning opportunities you could consider before the end of the tax year. Acting now could pay dividends in the future.
Act now to save money
Effective planning requires time and consideration, but with our help, you could significantly reduce your business and personal tax burdens.
In some areas the opportunity to save tax this year does not differ greatly from previous tax years. Tax planning includes taking advantage of allowances and exemptions including deductions for pension contributions and capital allowances. But, the 2009 Budget brought forward tax increases and the ongoing reform of the tax system means that paying close attention to tax planning is more important than ever before.
This tax year is in effect the 'eye of the storm' in which wholesale changes to the tax system come at us from all sides. The process started in 2005 with the formation of HM Revenue & Customs (HMRC) and since then the tax authority has been working on new powers to modernise the administration of the tax system. A significant amount of that new law has come into force this year, with more to come in the next few years.
At the same time, the current economic climate has prompted tax changes designed to provide some support for businesses during the recession, but it seems clear that some taxpayers will be digging quite a lot deeper into their pockets in future years to replace lost Government revenues.
With so many changes afoot, taxpayers should be particularly careful to make sure they appreciate the impact any present and future changes might have on them.
Here is a brief summary of changes in the current tax year:
New penalties
There are a number of new penalty regimes coming into force, and for business owners and private taxpayers alike the new message from the tax authority is, 'Take care to avoid a penalty.' While penalties for inaccurate returns started in 2009, the regime is extended in 2010 to all taxes and duties, and some other tax obligations such as registration for VAT.
The new regime is designed so that taxpayers who take reasonable care over their affairs - keeping records and providing their adviser with all information relevant to their tax position in a timely manner - will never be penalised for an understatement on their return. However, those taxpayers who are careless can expect more significant penalties in future, with a penalty of 30% for careless errors and much higher levels for deliberately mis-stating income. Even where penalties might apply, however, taxpayers are encouraged to come forward and disclose understatements on returns, with significant discounts for disclosing omissions – leading to a reduction to nil for careless mistakes.
In 2010 there will be new penalties for late returns and late payment of tax, and the practice of capping a penalty at the tax outstanding whereby those with little or no tax to pay can file late with impunity will end. Now is a good time to get your tax affairs right up to date. Of particular importance is the need to pay PAYE and NIC liabilities on time each month or quarter, as there will be a new penalty for those who pay late. As late payment of PAYE has not previously carried an interest charge, many employers may have become used to "letting slip" their payment dates for this liability. It is essential that from May 2010 all payments are made by 19th of the month for payment by cheque, and 22nd for those paying electronically. You may need to think carefully about your business funding if you have normally taken advantage of the relaxed regime currently in place.
New compliance powers
Much has been written about the new HMRC compliance powers, which were developed to provide a more flexible targeted approach to checking tax returns. HMRC can call for documents and information and are entitled to visit your business premises, but take up of the new powers has initially been slow and no problems have been reported as yet. For business owners there is much emphasis again on adequate record keeping, and you might wish to review areas of weakness in your records and take steps to introduce controls designed to show that the records are adequate as a basis for the tax return. This is particularly important for businesses accepting payment in cash.
New tax rates
The Finance Act 2009 introduced the necessary legislation to enable the top rate of tax to be increased to 50% on taxable income in excess of £150,000 in any tax year. Although this will probably be introduced from April 2010, 50% will not actually be the top rate of tax next year. Those with income of a little more than £100,000 will suffer a withdrawal of their personal allowances. For every £2 over the income limit the personal allowance will reduce by £1, meaning that affected taxpayers will bear 60% effective rate of tax on a band of income of around £13,000, returning to 40% thereafter. The income for this purpose is after any reduction for pension contributions and gross charitable donations, so these can be particularly tax efficient next year. This may impact on your desire to make charitable donations at the end of 2009/10 which would be more tax efficient in early 2010/11.
Pension contributions restriction
The most controversial of the measures introduced in the last Budget was a restriction on tax relief on pension contributions affecting those with income of more than £150,000. Although this measure will not come into force until 2011, concern about affected taxpayers avoiding the change by inflating their contributions in the current year resulted in the 'pensions forestalling' measures. In short this measure is intended to prevent those with income in excess of £150,000 from increasing their contributions in 2009/10 and 2010/11, but as the rules are extremely complex you will need to take detailed advice if you think you might be affected by them. The Pre Budget report reduced the limit for affected taxpayers to £130,000 with effect from 9 December 2009.