As we move to the beginning of a new tax year there are a number of tax planning initiatives businesses may wish to consider. This article concentrates on three areas which affect most businesses, be they Limited Companies, Sole Traders or Partnerships.
1. Losses - Temporary extension to carry back of trading losses
The Finance Act 2009 allows trading losses to be carried back against previous years’ profits. For companies this relates to losses made in accounting periods ending between 24 November 2009 and 23 November 2010. For Sole Traders and Partnerships, the losses are those made in the tax years 2008/09 and 2009/10.
The amount of trading losses which can be carried back to the preceding year remain unlimited, after which a maximum of £50,000 can be carried back to each of the previous two years. This means that a total of £100,000 in addition to the unlimited carry back to the previous year can be claimed, subject of course to sufficient losses being available for carry back.
2. Capital Allowances – fuel efficient motoring
A first year allowance of 100% is available to purchasers of cars registered on or after 1 April 2008 which either emit no more than 110 g/km of CO2 or which are electronically propelled. At the time of writing this article, examples of cars which would qualify for this allowance are as follows;
• VW Golf 1.6tdi - 99g/km
• Volvo S40 1.6d - 104g/km
• Audi A3 1.6 - 109g/km
• Honda Civic 1.4 - 109g/km
3. Extracting profits from a Limited Company
By taking a relatively small salary and reducing the level of dividends, an individual may receive a total remuneration package of £43,875 and not pay a penny in income tax. The company will however be subject to Corporation Tax on its profits.
Assumptions – two directors each with equal number of shares
Salary - £5720 per annum per director
Profits – less than £100,000
Taxable profit 86,936
Corporation tax @ 21% 18,256
Dividends £34,340 per director £68,680
Gross dividend per director (34340 × 10/9) 38,155 - includes tax credit of £3,815
Total income per director £43,875
Income tax liability on dividends Nil (covered by 10% tax credit)
Every additional £1 in dividends over £34,340 costs 25p in tax so the net marginal rate is 40.75% on profits earned. Total tax liability on £100,000 profit is £18,918 made up of Corporation Tax liability of £18,256 plus marginal rate tax of (100,000 – 98,376 × 40.75%) = £662.
The above example will provide some food for thought and if you require any advice on either tax or accounting matters please feel free to contact either Robert Ellis or Peter Way-Rider at Ellis & Co on 01244 343504.
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