Overview of 2012/13 changes

This tax year has seen numerous changes that need to be taken into account when planning to reduce your tax liability. These include:

New tax provisions have been introduced that are designed to assist businesses and investors. This year there have been generous increases in the Enterprise Investment Scheme (EIS), research and development relief, and Entrepreneurs' Relief, and the creation of the Seed EIS scheme for investors in brand new businesses. New enterprise zones are being created, the main rate of corporation tax has been reduced and a special national insurance holiday scheme for new businesses remains in place in many areas within the UK.

Against this, over the last few years there has been a reduction in capital allowances, increases in national insurance, a new high rate of capital gains tax, further increases in the company car and fuel benefit charges, and the abolition of some capital allowances for buildings.

The reduction of the top rate of income tax from 50% to 45% on 6 April 2013 presents a clear incentive to defer income, while the continued above inflation rises in the basic personal allowance have the effect of widening the band of income above £100,000 which is taxed at 60% due to the tax allowance being withdrawn. With so many changes afoot, taxpayers should be particularly careful to make sure they appreciate the impact any present and future changes might have on them.

Penalties

Penalties introduced in previous years focussed on late filing and late payment of tax, with some taxpayers fined £1,000 or more for late tax returns. Penalties for late filing are charged even where no tax is owed or a repayment is due, so the message again this year is to make sure that your tax return is submitted on time. Where a payment of tax is due, filing before the end of the calendar year allows that tax (provided it is no more than £3,000) to be collected through your PAYE code in the following tax year. This represents an interest free loan for 14 months - worth being aware of!

There are also significant penalties for late payment of PAYE monthly by employers, and businesses and individuals alike need to be aware that with the austerity drive comes a new determination by HMRC to collect tax as quickly as possible.

If you think you will have trouble meeting a tax liability as it falls due, it is always better to contact HMRC to establish whether they will allow ‘time to pay'. Reaching an agreement would eliminate the penalties for late payment, provided you comply with the payment arrangements. Remember that interest is always added to late paid tax. Unlike penalties, you cannot appeal against an interest charge.

New compliance powers

Once again, HMRC is rolling out new initiatives with disclosure facilities offered to a number of business groups this year, and a new agreement with the Swiss authorities which requires those with accounts in Switzerland to either pay a substantial tax charge or disclose their account to HMRC.

For business owners the emphasis is again on adequate record keeping; a pilot compliance exercise looking at business records has been halted for review, but this is an area HMRC is likely to concentrate on in the future. This is particularly important for businesses accepting or making payments in cash. HMRC is also employing ‘hit squads' who concentrate on a particular business area in one town or city, for example fish and chip shops in Manchester. The arrival of one of these special teams will mean that every aspect of the business is examined in detail. The fact that these initiatives have raised substantial amounts of tax and national insurance mean they are likely to be a permanent feature of tax compliance work.

New tax rates

The 50% additional rate of income tax remains on taxable incomes above £150,000, but this rate reduces to 45% on 6 April 2013. This means that those who are able to defer income from 2012/13 to 2013/14 could benefit from a 5% or more reduction in the tax charged on the amount deferred. This is a key planning area you may wish to discuss with us.

Once again, 50% is not actually the top rate of tax. Those with income of more than £100,000 suffer a withdrawal of their personal allowance. For every £2 over the income limit the personal allowance will reduce by £1, meaning that affected taxpayers will bear a 60% effective rate of tax on a band of income of £16,210.

The income for this purpose is after any reduction for pension contributions and gross charitable donations and so these can be particularly tax efficient, especially when your income is just over £100,000.

Pension contributions restriction

The annual limit on tax relief for pension contributions reduced to £50,000 in 2011. Now that some time has passed since the change you may be accustomed to the new restriction, but you should be aware that unused relief in the years leading up to the change can still be accessed in certain circumstances. Generally speaking, available unused relief is carried forward three years, but the amount unused is determined by the contributions made in the ‘pension input period' and not the tax year, so you will need to ensure that you have the right calculations before investing.

Child benefit changes

From 7 January 2013, those with income of more than £60,000 who are either entitled to child benefit themselves or live with someone who is entitled to child benefit lose the amount of child benefit received through an additional tax charge. The charge will be levied on the individual who has the higher income (net of pension contributions and gift aid) which is expected to push 500,000 people into the Self Assessment system. Those with income between £50,000 and £60,000 will suffer a partial claw back of child benefit, while households where neither partner has income of more than £50,000 will not be affected by this change. This measure is likely to pose some difficult practical issues, and affected families may wish to consider whether they would prefer to disclaim the child benefit before the new system starts. Claims will be required in the autumn, and need to be lodged before the new rules start. It will still be important for non-earning spouses to register even if no benefit is claimed to benefit from added years towards their state pension.