The budget contained changes to personal and business taxation, including the 50p headline rate of income tax will be cut to 45p from April 2013.
The income tax personal allowance set to rise to £8,105 next month, the Chancellor also confirmed that a further rise will take place in 2013, taking the allowance to £9,205. However, age-related tax allowances are to be frozen, and will stop for anyone turning 65 after 5 April 2013.
The main rate of corporation tax will fall from 26% to 24% in April 2012. Individuals and partnerships in business whose turnover is up to £77,000 are also set to benefit from 'radical reform' of the tax administration system.
Tax Tables can be found athttp://cdn.hm-treasury.gov.uk/as2011_rates_and_thresholds_201213.pdf
Reduction in the lifetime allowance - PENSIONS
The reduction in lifetime allowance which takes effect on 6 April 2012 reduces the allowance from £1.8m to £1.5m. It is possible to elect for the old limit to continue to apply to your pension savings, but you must do so by the end of the tax year. there can be no investment in pensions after 5 April 2012, and no increases in benefits other than those permitted by the legislation
Annual Investment Allowance Reduction (AIA)
Make full use of the enhanced annual investment allowance before it’s too late! If you leave the decision of whether to buy new equipment or plant and machinery until the end of your accounting year, you could get caught out by the changes to capital allowances which come into effect from April 2012*. Large purchases made from these dates to the end of your accounting period may not qualify in full for the 100% deduction against profits you are expecting.
AIA is a form of capital allowances which offers tax relief at 100% on all qualifying expenditure in the year of purchase. From April 2012 the current level of annual investment allowance is being reduced from £100,000 to £25,000. If your accounting year end coincides with the fiscal year there are no complications as all qualifying expenditure (up to £100,000) will receive a 100% deduction for income or corporation tax purposes. But what happens if your trading year straddles the fiscal year end? The answer is that that the AIA relief available is time proportioned and this may result in a loss of relief.
If your business has a chargeable period that spans the rate change the maximum allowance for the transitional period falls into 2 parts
1. Generally speaking its more tax efficient than employment
2. More control over your personal income: No tax deducted at source or NIC
3. You can claim valid business expenses: Expenses lower the profit of the limited company, this decreases the tax it has to pay. This is a huge benefit for contractors because you can now claim expenses that you would not have been able to claim as a permanent employee.
4. Flat Rate VAT option: Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate. Bear in mind its calculated on your gross sales.
5. National Insurance Uplift: Most recruitment agencies will offer you a National Insurance (NI) uplift if you decide to contract through a limited company. If the recruitment agency pays you like a normal employee (PAYE) they will deduct Employer National Insurance tax
When you are a contractor you get paid for your services rendered, you do not get paid a gross salary which means no Employer National Insurance tax is payable by the recruitment agency. So in effect they save 12.8% tax. This is why the contractor’s rate is normally higher by 12.8% than the gross salary rate the recruitment agency will offer you.
Disadvantages: 1. If you don’t work, you don’t get paid: As a permanent employee you usually get permanent employee benefits like annual leave and sick leave. As a contractor you won’t have these benefits.
2. Accounting costs: This will off course be an expense to your limited company. However if you manage your company properly then your tax savings and higher rate could easily absorb these costs so you’ll still be much better off contracting through a limited company.
3. Administrative hassle: you’ll have some basic responsibilities as the director of a limited company. Responsibilities include the raising of invoices and payment of taxes at specific times during the year. Once you’ve got the hang of it, the tax saving of contracting through a limited company will be well worth the extra administrative tasks.
Before going ahead its important to seek professional advice, for example, IR35 affects all contractors who do not meet the Inland Revenue's definition of 'self employment'. The IR35 rules will result in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future.
Licenced Accountant in Brighton