Prepare for Tax increases
Taxes will be going up from 2010. There are two main reasons we can be sure of this:
There are several tax rises that have already been announced, but have yet to take effect.
After the forthcoming general election, whoever sits in 11 Downing Street will want to take advantage of the long period before the next trip to the polls to deliver some necessary but bitter financial medicine.
Personal allowances
Mr Darling originally revealed planned changes to personal allowances in the 2008 Pre-Budget Report. Five months later he revised his proposals in the Budget proper, making them harsher. From 2010/11, your standard personal allowance will be reduced by £1 for each £2 of ‘total income’ over £100,000. As a result, if your total income is over £112,950, your personal allowance will be zero. Between those two points, your effective income tax rate is 60% because for each £2 of income, you will be paying tax at 40% on £3 once the lost allowance is taken into account.
The calculation of ‘total income’ is complex, but importantly pension contributions are deducted in arriving at the figure. This can mean that the 60% marginal tax rate becomes a rate of tax relief, as the example below shows.
Higher rate tax
The increase in the top rate of income tax followed a similar pattern to the changes to personal allowances. In December 2008 the Chancellor announced a new 45% higher rate for incomes over £150,000, to be introduced from April 2011. The April 2009 Budget moved the new rate up to 50% and brought forward its start date by a year. For dividends, the new top rate will be 42.5%.
The new 50%/42.5% rates will also apply to discretionary trusts. This makes accumulation of income within a trust relatively unattractive, particularly when the trust rate of tax on capital gains is 18% after an annual exemption of up to £5,050.
Company cars
From April 2010 the emissions bands for company cars will be notched down by 5g/km, which will add an extra 1% of value to the taxable benefit of most cars. For example, the taxable value a car with a list price of £30,000 will typically rise by £300. In April 2011, another 5g/km is removed from the thresholds, adding another 1% taxable benefit. At the same time the £80,000 cap on list prices for benefit calculation purposes will be scrapped – bad news if you own an Aston Martin.
The PBR revealed that another 5g/km reduction would be made for 2012/13 alongside a reworking of the scales that will mean only cars with CO2 emissions of under 100g/km will benefit from the lowest 10% charge (13% for diesel). Until then the low emission threshold is 120g/km or less.
To check your car’s emission levels, visit http://www.smmtco2.co.uk/co2search2.asp.
ACTION
The income tax increases – both announced and those awaiting the post-election Budget – have increased the importance of tax planning. This season’s tax year end planning is a great opportunity to put things in order.
Call us now to arrange a time for your tax year end review. Don’t leave it until mid-March – there is always a risk that the Budget will close off an opportunity.
Inside this issue:
Online filing of VAT returns - James Gransby of Larkings shares some news
Preparing for Tax Increases - Robert outlines some stark choices to be made
Wealth Creation Specialist - January 2010 Newsletter
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HMRC are reminding businesses that new rules on how VAT returns are submitted and payments are made will come into force next year. Paper VAT returns will be phased out from 1 April 2010.
As a start of this phasing out process, businesses with:
* annual turnover of £100,000 or more, and
* all businesses which register or should have registered for VAT on or after 1 April 2010
will need to submit their VAT returns online and make payments electronically from April 2010. Those businesses that are already VAT registered, with a turnover below the threshold, will have the choice to use paper returns but this will be reviewed by 2012.
Further guidance has been issued together with details of the penalties for failing to make an electronic return.
HMRC have announced a period of grace which means that penalties will not be imposed initially, however periods ending on or after 31 March 2011 will be charged. This grace period is to allow businesses to adjust to the change in procedures.