Be smart, stay one step ahead of the taxman
Last updated 16:54, Saturday, 05 July 2008
Many of us have just received a dull-looking brown envelope from HM Revenue and Customs (HMRC) containing a demand for tax. Unfortunately, the contents cannot be ignored.
Those who keep their tax affairs up to date and know already what their liabilities will be for the year can avoid paying too much tax.
Some people who leave it all to the last minute in January will have paid the taxman too much in July and will have to wait to get it back.
The way that the self-assessment system works in this country is that you pay the income tax bill in up to three instalments.
The bill for the year ended April 5, 2008 is paid in two payments – on account on January 31,2008 and July 31, 2008. There is then a balancing payment due on January 31, 2009.
Capital Gains Tax, if any, is also paid on January 31, 2009.
The payments on account are based on the tax liability for the previous year but if your likely tax bill is falling then you can reduce these to the expected figures. If you reduce them by too much you are charged interest!
Retirement is often an occasion when income falls and the self-employed among us sometimes have fluctuating profit levels.
Even the different tax treatment of various investment products can cause differences for those who normally have more stable income levels.
It is of course far easier to take steps to reduce tax liabilities during the year itself but all is not quite lost.
It used to be the case that the tax system included a whole range of tax reliefs allowing tax liabilities to be reduced after the event. This is now much more restricted.
The most effective option remaining is called the Enterprise Investment Scheme (EIS). This is a set of rules under which investments for new shares in certain companies qualify for both Income Tax and Capital Gains Tax advantages.
The detailed rules are somewhat complex and space simply does not permit a detailed explanation, but my colleague Paul Dickson can provide details of suitable investments that qualify.
Income Tax relief of up to 20 per cent of the amount invested can be obtained in the year of investment and, if you act before October 6 up to half of that can be given in the previous tax year.
There is no Capital Gains Tax (CGT) on the investment itself but the most interesting CGT tax break is the ability to reduce liabilities that have occurred during the previous three years. This can provide an up-front tax reduction of up to 40 per cent of the amount invested in addition to the Income Tax of 20 per cent. Now the CGT does return when the investment is sold but only at the rate of tax that applies at the time.
Often they will have paid tax at 40 per cent in the past but the rate is now 18 per cent.
The EIS investments are often fairly volatile – that is why they were given these tax advantages. There are some, however, that are asset backed.
I cannot stress enough the importance of taking good advice so that you only do this if it is right for you and that any investment bought is properly.
- For advice on tax planning call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk.
