End of Year Tax Planning

So, 2012 is now well and truly upon us. For many people January will have been an unpleasant month with corporation tax payable having had to be paid by 1st January for those companies with a 31st March year end or by 1st February for those with a 30th April year end. For individuals there has been the need to pay any balancing payments and first payments on account by the end of the month.

It would be great to breath a big sigh of relief and try to forget about tax for a while but this is actually just the time when you need to give some careful thought to your business profits and to consider some simple tax planning procedures.

No matter what year end you prepare accounts to it is important to consider capital expenditure. This is because capital allowances apply for the fiscal year. For the current fiscal year to 31st March (for companies) or 5th April (for unincorporated businesses) there is an Annual Investment Allowance of £100,000 for certain capital items, but this will be reduced to £25,000 for the following fiscal year. (If you do not have accounting periods that tie in with the fiscal year then these limits are time apportioned). If you have not fully utilised your allowance and have plans to purchase qualifying capital items then, cash flow permitting, it would be beneficial to make these purchases before rather than after 31st March. (Non qualifying assets include cars, plant and machinery gifted to your business or that was previously used for another purpose).

Another consideration for incorporated businesses and individuals is the possibility of making pension contributions. For companies qualifying pension payments are an allowable expense, reducing the taxable profits. At the same time the payment can form part of a remuneration or reward package. For individuals the benefit is for higher rate tax payers as they will receive an extension to their basic rate band, thereby exempting some of their income from higher rate tax.

Making pension contributions though must also be viewed in terms of individual circumstances - cash flow requirements, attitude to risk and one's view of the pensions market being just a few. You should consult an IFA for advice before setting up a scheme. You should also remember that there is an annual limit on individual's pension contributions of £50,000, although unused limits from the previous three years can be utilised.

For companies that are approaching the end of their financial year it should be time to take stock and consider the results of the year to date, possibly comparing them to targets set earlier in the year. With an understanding of the year to date figures and in the knowledge of reserves brought forward it is then possible to decide if any bonuses or dividends should be declared. In order for these to be allowable business expenses in the year they do not have to be paid by the financial year end, but a clear commitment to pay them must be evidenced by a board minute or resolution, and bonuses must be put through the payroll within nine months to ensure the tax deduction. You should remember that if you are declaring dividends these will not reduce your taxable profits but they are not subject to national insurance.