The AIA was introduced for expenditure incurred on or after 6 April 2008 (1 April 2008 for companies) by all businesses.
It gives a 100% write-off on most types of plant and machinery costs, but not cars, of up to £50,000 per annum. Any costs over the AIA will attract an annual ongoing allowance of 10% or 20% depending upon the type of asset.
The £50,000 limit may need to be shared between certain businesses under common ownership.
In addition to the AIA all businesses are eligible to a 100% allowance, often referred to as an enhanced capital allowance, on certain energy efficient plant and low emission cars.
Other plant and machinery allowances
General first year allowances (FYA) were abolished in 2008 but a temporary FYA of 40% is available for expenditure incurred by a qualifying activity in the12 month period commencing 1 April 2009 for companies and 6 April 2009 for individuals and partnerships. This will be useful if a business plans to spend more than its AIA entitlement but it is not available for certain expenditure including plant which is classed as integral features and cars.
Motor cars
The tax relief rules on cars purchased from 1 April 2009 for companies and 6 April 2009 for individuals have significantly changed. The tax relief position is now determined by the CO2 emissions of the car not by the price of the car. Cars already purchased will continue to get a 20% annual allowance with a maximum annual allowance of £3,000 if exclusively used for business.
The tax allowance on new purchases will depend on CO2 emissions. Essentially those with emissions up to 160 will continue to get the 20% allowance and those in excess of 160 will only be eligible for a 10% allowance. There is no £3,000 restriction.
Industrial and agricultural buildings and hotels
These are currently being phased out with 2 tax years still to run. For example, the annual rate of allowance for 2009/10 (1 April 2009 for companies) is 50% of the allowance claimed in 2007/08. In 2010/11 it will be 25% and then the allowances will cease. Special rules apply for accounting periods straddling these dates.
Paying the tax
The self employed may have to pay tax three times a year, namely:
- 31 January in the tax year
- 31 July following the tax year
- 31 January following the tax year.
In certain circumstances, the first two payments can be waived.
Companies
Unlike sole traders and partnerships who pay tax on profits only (and drawings are ignored), companies have two layers of tax. The first is tax payable by directors and shareholders on money they take out of the company and the second is corporation tax which is due on the company’s profits.
Practical Tip
The payments on account system can make tax payments very volatile if profits fluctuate widely from year to year. You must plan ahead carefully to avoid nasty shocks.
However if you are having difficulties paying tax liabilities due to the current economic conditions then you may be able to spread payments over a period of time to suit individual business circumstances using the HMRC business payments service. Please contact us for further information if this affects you.
Tax on ‘drawings’
The directors of the company will normally be paid a salary and this is taxed under PAYE as for all employees. The cost of this, including the employer’s NIC, is generally an allowable expense of the company.
The government initially planned to increase the small company rate to 22% in the year to 31 March 2010 but this has been deferred.
Corporation Tax
| Year to 31.3.10 | Year to 31.3.09 | |
| Small company rate |
21% |
21% |
| Marginal rate | 29.75% | 29.75% |
| Full rate | 28% |
28% |
The small company rate normally applies where profits do not exceed £300,000. It also applies to the first £300,000 where overall profits are between £300,000 and £1,500,000.
The balance of the profits between £300,000 and £1,500,000 are taxed at the marginal rate of 29.75%.
The full rate applies to all profits where those profits are greater than £1,500,000.
The shareholders of the company may be rewarded by the payment of dividends on their shares. In most small companies the directors and shareholders are one and the same and so they can choose the most tax efficient way to pay themselves. Using dividends can result in savings in NIC. This requires planning. Please talk to us to decide the best options for you.
Tax on profits
The profits of a limited company are calculated in a similar way as for unincorporated businesses and the same rules about expenses and capital allowances generally apply. Remember though that the salaries paid to directors, but not the dividends paid to shareholders, are deductible from the profits before they are taxed.
Payment of tax
PAYE and NIC on salaries is payable monthly (or quarterly where the amount due is less than £1,500 per month).
Corporation tax is usually payable nine months and one day after the year end, so the choice of year end has no tax consequence.
Tax Planning
In recent years companies have become more popular as they have usually resulted in less tax being paid overall. Tax rate changes year on year mean that this will not always necessarily remain the case.
This issue is complex as the comparison calculations have to take into account current and future government proposals on income tax and NIC rates.
Do get in touch if you would like us to review your particular circumstances.
Income shifting
Over recent years, many families have been attracted by the savings that can be made by combining small salaries and large dividends. The savings could be increased by introducing a non-working family member into the business as a shareholder or co-owner, to use up their personal allowance and lower rates of tax.
Proposed new rules aimed at counteracting this were due to be introduced from 6 April 2009 but have been shelved for the present. Care still needs to be taken as aspects of the existing ‘settlements legislation’ could still be used to challenge certain arrangements. If you have any questions or concerns, please do not hesitate to contact us.
