Annual Investment Allowance (AIA)
One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance (AIA) to £100,000 per annum with effect from 6 April 2010 (income tax ) and 1 April 2010 (corporation tax) represents one of the few increases in allowances. The AIA is the amount of capital expenditure (plant and equipment not cars) you can write off against taxable profits.

Unfortunately first year allowances (FYA) were also reduced at the same time. The combination of increases in the AIA and the reduced FYA (20%) for expenditure in excess of £100,000, the l breakeven point for capital expenditure is now £250,000. Expenditure in excess will, in real terms, qualify for less total capital allowances in 2010-11 than in 2009-10.

How can AIA be used to plan for tax efficiency. Lets use a self-employed business owner to illustrate how this could work. If we assume our trader is making a taxable profit of £250,000 before tax and capital allowances. As of the start of the current tax year this owner would be facing an income tax charge of 50% on earnings in excess of £150,000. The tax on the element of profit in excess of £150,000 alone will amount to £50,000 (£250,000 less £150,000 gives £100,000 subject to 50% tax)

By purchasing £100,000 worth of qualifying plant or equipment, our trader could write off his £100,000 investment against his £250,000 profits and eliminate the entire 50% rate income tax charge saving £50,000 of tax. Immediately the tax saving has reduced the cost of the investment by half.

Abolition of the Personal Allowance Creates a New 61% Tax Band
In 2010-11 tax year your personal allowance will be reduced by £1 for every £2 that your income exceeds £100,000 until it is eliminated when your earnings reach £112,950.

The £12,950 of earnings above £100,000 is taxed at 40% add to this the 40% of the lost personal allowance and you are paying an additional 60% in tax. By adding the additional 1% National Insurance charge this goes up to a 61% marginal rate.

Anything that can be done to keep earning under £100,000 per annum should be considered. Maximising the use of AIA, salary sacrifice or increasing pension contributions can also be used to create a viable tax saving strategy.

If you would like to speak to Moore Hill Accountants about how we can help you to minimise you taxes please call us at our Warrington Offices on 01925 830830.