Your 2009 tax return tax is paid, so now ahead and prepare the new tax year on --By Umesh Modi

For those with income over £150,000, 2010/ 2011 will see the top rate of income tax increase to 50 per cent. If you are one of those affected, you may consider taking steps to minimise your taxable income in 2010/11, either by bringing income forward so that it falls in 2009/10 and is taxed at 40 per cent rather than 50 per cent or by delaying capital expenditure to claim
capital allowances in 2010/11 rather than in 2009/10.

For director/shareholders, taking remuneration and/or dividends on or before April 5 2010, will bring the income into the current tax year; likewise, sole traders/partners may consider whether it is possible to bring income forward into 2009/10. Of course, the tax bill on that income will also be brought forward – to January 31 2011 for 2009/10 liabilities, as
opposed to January 31 2012, for 2010/2011 liabilities – but this is weighed against a saving of 10 per cent in income tax.

For sole traders/partners, the timing of expenditure may also reduce the impact of the 50 per cent band – under the new Annual Investment Allowance (AIA), a 100 per cent allowance is available for the first £50,000 of expenditure on plant and machinery each tax year (capital allowances at a lower rate are available on expenditure over £50,000). Delaying
capital expenditure until after April 5 2010 ensures that you claim the AIA against profits taxable after the introduction of the 50 per cent tax rate, reducing your exposure to the top tax rate.

While bringing income forward into the current tax year brings the highest rate of income tax down from 50 per cent to 40 per cent, director/shareholders may also consider reducing their income by leaving funds in their limited company – this will reduce exposure to the 50 per cent tax rate and could potentially bring the eventual tax rate on those funds down
to 18 per cent or even 10 per cent.

A company’s profits after corporation tax (currently 21 per cent or 28 per cent depending on the level of profits) will be taxed on the shareholders only when they are paid out as dividends. If however those funds are left to accumulate in the company until the shares are sold or the company is wound up, the shareholder will suffer capital gains tax rather than income tax on the gain. The rate of CGT is currently only 18 per cent of gains over the annual exemption (currently £10,100) and the rate on the sale of business assets – including shares in a trading company – is reduced to 10 per cent by entrepreneurs’ relief.

Year-end tax planning
Whether or not you will be affected by the 50 per cent tax rate, there are various ways in which you can save tax in the current tax year:
• Invest in an ISA: the maximum amount you can invest is £7,200 per annum, of which up to £3,600 can be in a cash ISA with the rest in a stocks and shares ISA; as of October 6 2009 investors born before April 5 1960 can invest up to £10,200, with up to £5,100 in a cash ISA. The higher limits will apply to all investors from April 6 2010.

• Invest in shares qualifying under the Enterprise Investment Scheme (EIS) – the conditions are complex but broadly, income tax relief at 20 per cent is available for investment of up to £500,000 in qualifying shares. In addition, any gains made on the EIS shares are tax-free as long as various conditions are met.

• Similar reliefs to the EIS are available for investment in a Venture Capital Trust (VCT)

• Use your annual exemption for capital gains tax: gains of up to £10,100 will be exempt from CGT

• Use your annual exemption for inheritance tax: a gift of up to £3,000 per year is exempt, reducing your estate for IHT. The exemption can be carried forward for one year, so if you did not use your exemption in 2008/09 you can make a gift of up to £6,000 in 2009/10

Pension contributions
With effect from April 6 2011, higher-rate income tax relief on pension contributions will be withdrawn for those with, broadly, gross income of £150,000. To prevent individuals making significantly larger than usual pension contributions before April 6 2011, “anti-forestalling” rules have been brought in, which impose a tax charge at 20 per cent on contributions in 2009/10 and 2010/11 above the “special annual allowance”, effectively restricting the relief on those contributions to the basic rate.

The special annual allowance is generally £20,000 (£30,000 in some cases). An individual’s regular monthly contributions, started before the rules were introduced, are “protected pension inputs” and not subject to the charge; however they utilise the allowance so where an individual makes regular contributions totalling more than £20,000, any additional contribution
will be subject to the charge. Higher- rate relief will therefore be available in 2009/ 10 and 2010/11 on “protected pension inputs” and, where those total less than £20,000, additional contributions up to the £20,000 limit. Krystyna Knight, of Silver Levene provided research for this article.