Key issues for owner-managers
Tax and National Insurance rates continue to rise. This means that many more people will be paying higher rates tax in 2011/12. For this reason, it may be sensible to consider, if you can accelerating income, such as dividends, if possible, by bringing them into 2010/11,
Where directors are paying low salaries and topping the balance up in dividends they will want to:
• Check that they have optimised their position for 2010/11.
• Devise new schedules in order to maximise their allowances in 2011/12.
2011/12 changes to tax rates & allowances
• Changes to personal tax allowances and tax rates for income tax in 2011/12 will potentially see more taxpayers paying tax at the higher rates of 40% or 50%.
• In 2011/12 all earners and employers will see National Insurance increase by 1%.
Have directors with spouses (or civil partners) used up their personal allowances, basic rate bands and optimised their tax allowances this year?
• Do they need to consider a re-division of income producing assets before the start of the new tax year?
• Should the company issue different classes of share to ensure that dividends can be voted to different shareholders on a flexible basis?
• Do they need to execute any dividend waivers ahead of 2011/12
Marginal tax rates
Where it looks as if a director will lose his personal allowances in a year (where income is in excess of £100,000) or start paying tax at 50% he can consider these options for reducing tax:
Loans to directors - take a loan instead of a salary in March
• Providing that the outstanding balance is not in excess of £5,000 there will be no taxable benefit when the company lends the director cash.
• The amount should be agreed in a board meeting.
• Repay the loan within nine months of the company’s year-end to ensure that the company does not incur an additional tax charge.
Ensure that pension contributions are calculated correctly:
• The Special Annual Allowance anti-forestalling measures affect irregular contributions made by higher earners 2010/11.
• Changes to pensions Annual Allowances ahead of the 2011/12 tax year, place restrictions on the amount of contributions that can made after 14 October 2010. These potentially affect anyone who is considering making a contribution in excess of £50,000.
Review tax compliance -Unlawful dividends
HM Revenue & Customs are reviewing dividends to ensure that they are voted correctly. If a dividend is paid out illegally, HMRC will generally assess the company to PAYE and NICs on the basis that it is a cash advance of earnings.
Check that the dividends are properly voted and constituted, with accounts in place in order to confirm that dividends are not paid out illegally.
• The tax consequences of an unlawful dividend depend on the company’s status and whether an unlawful dividend is repaid by the shareholder.
• This looks as if it will provide a rich source of pickings for HMRC: proprietors keep an eye on your drawings.
Employee benefit trusts (EBTs)
If a director or his family has received any benefits from an EBT these should be reviewed in the light of new measures introduced in November 2010.
Watch the timing of bonuses.
• Consider tax position if a bonus is due for payment (or credited to a loan account) before 5 April 2011.
• If the bonus is to be deferred and paid in 2011/12 consider the added cost of NICs.
Savings, investments and gift-aid
• Consider investing in ISAs, or topping up ISA investments up to annual limits, in order to avoid any future higher rate tax on savings income.
• There is still time to invest in Enterprise Investment Scheme (EIS) companies in order to secure 20% income tax relief.
• Donations under gift-aid will attract tax relief.