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How to pay less tax

Accountant Paul Samrah gives a series of useful tips on you can pay less tax

Accountant Paul Samrah gives a series of useful tips on you can pay less tax

1 One of the most effective ways to reduce the tax you pay is to plan for tax as a family. Use both your own and your spouse's annual personal allowances – for 2008/09 this was £6,035 each. If your spouse (or any other person) is helping out with practice tasks, such as administration or running errands, consider paying them a small salary. It will be fully tax-deductible in your business.

2 Any employer taking on a new employee or transferring an existing employee, where they have to move home to be near the new job, should consider the relocation package exemption. This allows up to £8,000 to be paid free of tax and national insurance contribution (NIC), to cover costs associated with the move, including hotel or other temporary accommodation, travel between the old and new locations and costs of selling a former home or buying the new one (including legal fees, agent's fees, and stamp duty land tax).

Read the conditions and remember the exemption only applies if the employer bears the costs, either directly or through reimbursement. So, even if the employer did not intend to pay the relocation costs, consider a lower salary in the first year topped up with a relocation package.

3 Childcare vouchers can be offered in addition to salary, but are more commonly offered as a ‘salary sacrifice'. This means employees sacrifice a specific amount of their salary and instead receive that amount in childcare vouchers (up to a limit of £55 a week, or £243 a month).

Vouchers are exempt from tax and NIC, so an employee only pays tax and NIC on the reduced salary. A taxpayer paying 40% tax could save more than £1,200 a year in childcare costs. Each employed parent can claim the exemptions, so a two-parent family could save more than £2,400 (in the higher-rate tax bracket).

4 There is a cash-flow benefit if capital expenditure qualifying for capital allowances (CAs) is incurred towards the end of the accounting period. For tax purposes, the expenditure is incurred when the obligation to purchase becomes unconditional.

In certain circumstances, an unconditional order can be made late in an accounting period. The practice can claim CAs for that period, even if payment is not made until after the balance-sheet date.

5 On average 35% of the cost of building work is eligible for CA relief. In the case of new building projects, taking account of tax considerations at the planning-specifications stage can now generate significant savings in an increasingly complex area of taxation.

In addition, small businesses have an annual investment allowance of 100% for the first £50,000 of expenditure on most equipment and machinery, excluding cars.

The list of items qualifying for enhanced CAs, at 100%, has been extended. New additions include: waste water recovery and reuse systems, compressed air master and flow controllers, heat pump dehumidifiers and white LED lighting. Further details can be found on www.eca.gov.uk. Cars with CO2 emissions of 110g/km or less qualify for 100% CAs. For details of cars and their CO2 emissions, go to www.VCAcarfueldata.org.uk.

The effect of these changes will vary from practice to practice. It is therefore important to be able to identify all items of expenditure to ensure maximum tax reliefs are obtained.

6 The Enterprise Investment Scheme offers generous income tax and capital gains tax (CGT) relief to investors in certain companies. Relief is available to ‘qualifying individuals' who subscribe for ‘eligible shares' in ‘qualifying companies' undertaking a ‘qualifying activity'.

Subject to meeting the criteria, the first £500,000 invested in any one tax year will qualify for income-tax relief and CGT exemption. Income-tax relief takes the form of a credit against an individual's tax liability at the lower rate, currently 20%. Thus the maximum tax credit available to an individual is £100,000 in each tax year.

Providing the shares have been held for three years, their disposal is free of CGT. In addition, CGT on gains made from other disposals can be rolled over into an Enterprise Investment Scheme and the gains deferred to an unlimited extent.

7 Having amassed hard-earned wealth, the taxman of course then tries for another 40% take after your death. Inheritance tax (IHT) planning is therefore important and one way is to use the normal expenditure out of income rules to best effect. An individual with substantial sources of income may well have surplus funds each year. These will be available to make gifts as part of an ongoing estate-planning exercise. Look to establish an annual and habitual pattern of gifts over a period of time, which will qualify for exempt transfers under S21 IHTA 1984 (normal expenditure out of income), with the advantage that the gifts are not then simply potentially exempt, but disregarded for IHT purposes.

Paul Samrah is a partner at accountant Kingston Smith LLP

How to pay less tax

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