As far as I am aware, your tax payments are up to date and you filed your income tax self-assessment by January 31, as did two-thirds – 5,759,006 – of the UK self-assessing taxpaying population. Let me remind you of the main ways you can save tax.
The annual capital gains tax exemption should be used before April 6, 2010. Even though the value of your portfolio has dropped due to the global economic crisis, we will take the opportunity to review your investment portfolio to see whether there are holdings that have a gain broadly equal to the annual exemption. If there are, we will sell them and buy them or similar investments back. We will maximise the tax efficiency of Isas for you and your wife and we will move some of your holdings into your wife’s name so she can use her annual CGT exemption. Be aware that we cannot simply transfer shares to your spouse to benefit from this uplifted cost base. You have to sell them in the market and your wife must then buy them back. This will also help to make the most use of both your 20 per cent income tax brackets.
You have an annual gift exemption of £3,000. This exemption can only be carried forward one tax year so it is best to use it before April 5, 2010. If any of your children marry or enter a civil partnership, you can gift £5,000 to each child free of all tax.
Over the years, we have been developing a plan for tax-efficient profit extraction from your company. Small business dividends are taxed in exactly the same way as dividends received by all other companies in the UK, including stockmarket-quoted ones.
The two dividend tax rates are 10 per cent for standard dividend tax rate and 32.5 per cent for higher-rate taxpayers. These are the headline dividend tax rates. All dividends automatically get a 10 per cent tax credit as your company profits will already have been subject to corporation tax.
As you are a higher-rate taxpayer, the 10 per cent tax credit is taken away from the dividend upper rate, leaving a tax liability of 22.5 per cent.
Ensure that any directors’ loan account balances over £5,000 are cleared by way of dividend, salary payments or expenses reimbursement by March 31 so that your accounts reflect a directors loan account balance of less than £5,000 at the 2009/10 year end, which will remove any benefit in kind charge on an overdrawn loan account. This will also avoid the section 419 tax which may be payable by the company and is only refunded once the loan account has been repaid.
As your company generously pays towards pension contributions for your employees, these would have saved you 21 per cent in corporation tax for the 2008/9 tax year but will save you 22 per cent in corporation tax for the 2009/10 tax year. This means that £100 into a company pension would cost £79 in the 2008/9 tax year and £78 in the 2009/10 tax year.
As you have a considerable pension pot yourself through a Sipp, you need to be careful about the amount of money you have as pension savings due to the lifetime allowance which is £1.75m for 20009/2010 but is being frozen at £1.8m for five years the year after.
As your pension fund is currently above £1m, with reasonable growth, you could be subject to the highest level of tax in the UK on your fund at 55 per cent. Also, the annual allowance is higher at £245,000 for this new tax year but like the lifetime allowance is being held at £255,000 from 2010/11 to 2015/16.
Kim North (kim@techand tech.co.uk) is founder of Technology and Technical