Avoiding tax, by legal means
With the line separating tax planning and anti-avoidance being quite blurry at the moment, it is imperative that whatever attempts to minimise one’s tax liabilities are within the letter of the law as the government continues in its attempts to close loopholes in tax legislation
Q: Recently the prime minister made comments with regards the “morality” of tax avoidance schemes and his intention to legislate against these as quickly as possible. Without being regarded as one of those lacking moral judgement I wish to minimise my tax liabilities could you please provide some advice on how I could go about this?
A: It is becoming increasingly difficult to judge when tax planning becomes anti-avoidance as the government continues in its attempts to close loopholes in tax legislation.
I provide below some areas which you could safely consider in your attempts to reduce your current levels of taxation.
For those in business
People who are sole traders or partners within partnerships or limited liability partnerships should consider incorporating all or part of their business.
Running your business as a limited company (by incorporating) offers a range of tax planning opportunities. The benefits are derived in the main from the additional flexibility in the forms your income can be taken either as salary, dividends or shares.
If you are in business, you could pay a non-earning spouse/partner a salary, on which you will then attract tax relief. In addition to the salary, you can pay an employer’s contribution to your partner’s personal pension plan. There is no tax or NIC on the premium itself, and it should be an allowable business expense. It is important to note however, that the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work carried out.
Alternatively if you are a sole trader and incorporation is not suitable for commercial reasons then you could share the profits of your business by operating as a partnership.
You both need to be genuinely involved as business partners although not necessarily as equal partners
Consideration should also be given to your accounting year end date and whether this is most beneficial to you. Changing the date may release overlap relief that is available to you.
Remember it is possible to claim up to a possible 100 per cent tax relief if your business invests in certain qualifying plant and equipment during the current tax year. The 100 per cent relief is allowed up to £25,000.
If you operate your business as a limited company in which you both have shares, you should consider paying a dividend before 6 April 2013, if the gross income (including the tax credit) will fall into the basic rate band (£42,475 including personal allowance).
You could even gift shares to your spouse or civil partner shortly before paying the dividend, provided you make a genuine transfer of ownership with no conditions attached. It is advisable to leave as much time as possible between the gift and paying the dividend.
In certain circumstances, couples can save tax by switching income from one spouse or partner to the other. You should aim to use both individuals’ personal allowances (£8105 in 2012/13) and minimise any higher rate tax. You could transfer investment income by switching ownership of the asset that produces it, although there might be capital gains tax to pay if you are not married or in a civil partnership.
You could also simply transfer savings into your joint names so that half the income is taxed on each partner.
Ben Chaplin is managing director of QDos Taxwise