Exchequer Weblog

The taxation of pensions changed on A Day: 6 April 2006. From that date a cap (the so-called lifetime allowance) was set on the value of a pension fund that can be used to pay out tax favoured pensions, including a tax free lump sum of up to 25% of the fund. On A-day the lifetime allowance was £1.5 million, but it increases every year and is currently £1.65 million.

If your pension fund exceeds the lifetime allowance when you start to draw your pension the excess funds above the cap are taxed at up to 55%. The cap of £1.65 million sounds a lot, but if you have been in an occupational pension scheme for 20 plus years, especially one that has been well funded by your company, your personal pension fund could exceed that limit.

If your pension fund did exceed £1.5 million on A-Day you can register the total value of the fund with the Taxman. That higher registered value becomes your personal lifetime allowance, which increases each year until you retire. The higher personal lifetime allowance protects your pension fund from the 55% tax charge. But you need to get the registration process completed by 5 April 2009 for this protection to apply, so if you haven’t already done so, its time to start sorting it out.
You first need to get a valuation of all your pension funds from your various pension companies as the lifetime allowance applies to the sum total of the combined values. As you can imagine it can take months to collect all the necessary information, as some pension companies are very slow to respond. The pension industry estimates that up to 500,000 people could be eligible to apply for pension protection.

As a rule of thumb if you have been a member of an occupational pension scheme for 20 years or so and your highest salary multiplied by the years you’ve been in the scheme is more than £3 million, then your pension fund could be at risk of higher tax charges. However, the figures for you will depend on how the pension from your scheme is calculated. If you have the annual statements from your pension company we can help you get a rough estimate of the value of your pension fund, before going to the trouble of asking for a formal valuation of the fund.

All businesses can now claim a 100% allowance for items of equipment, including vans and trucks, but not cars, purchased from 1 April 2008, or from 6 April 2008 for unincorporated businesses.

This allowance is called the annual investment allowance (AIA), and it is capped at £50,000 per year, per single company, or per group of companies. This cap is also reduced in the first accounting period that straddles 1 April 2008, to take account of the portion of the year that falls before 1 April (or 6 April). So a single company that makes up its accounts to 30 September, could claim the AIA 100% allowance on up to £25,000 of expenditure incurred in the period from 1 April 2008 to 30 September 2008. Items purchased before 1 April 2008 may qualify for the old allowances for small or medium sized businesses of 50% or 40% for the first year.

Where expenditure incurred after 1 April 2008 exceeds the available AIA cap it still gets some tax relief at 20% or 10% in the first year, depending on the type of asset. Certain equipment, which is included on the Government approved list of energy or water efficient items, can attract a 100% allowance, called an enhanced capital allowance (eca). The eca is available whether or not the business has used its AIA cap for the year. Its worth checking on the ECA web site (www.eca.gov.uk ) whether an item of equipment qualifies before you acquire it.

The process of selling an established business can take some time. Even when you find a buyer the negotiations over exactly what will be sold can be drawn out. It makes sense to smarten up the company financially first. For example, dispose of any assets which are not really pulling their weight, such as obsolete machinery. Also any assets which have a personal connection with the directors, such as holiday homes or valued cars, can be put in the directors’ own names.

Now look at what tax reliefs you could benefit from on the sale. If you leave the country before the sale and stay abroad for a period of five years or more, you could avoid paying UK capital gains tax on the gain. However, you may pay tax on the profits in your new country of residence, so be careful about the country you choose!

Entrepreneurs’ relief can be claimed for most company sales, which reduces the effective rate of tax from 18% to 10% on the first £1 million of gains made by each shareholder. This can reduce the tax by up to £80,000 for each shareholder who qualifies for the tax relief. To qualify each shareholder and the company must meet all of these conditions:

• The shareholder must hold at least 5% of the ordinary shares of the company and 5% of the voting rights for the company for at least one year ending with the sale;
• The shareholder must be an employee, or director, or company secretary of the company for at least one year up to the date of the sale;
• The activities of the company must be at least 80% trading, as opposed to investments, or it must be the holding company of one or more trading companies.

Where family members hold a small number of shares check whether they will each meet the 5% threshold based on their own shareholdings alone. Consider gifting some shares to your grown up children or spouse to achieve this threshold. Where shareholders do own over 5% of the shares but do not work for the company, consider making them a director, or giving them a small part time position at the company for the year before the sale.

Company sales require a lot of planning, so talk to Exchequer as soon as you consider selling so we can help with the long term arrangements.

Fuel prices are rocketing, so employees are increasingly reluctant to use their own cars for business journeys. As an employer you can pay a tax free mileage rate to your employees of 40p per mile for the first 10,000 business miles driven in one tax year, and 25p per mile for extra miles in the same year. These rates haven’t been changed for over 6 years. To keep your employees happy you could pay a higher mileage rate, but you need to report the excess amount paid on the form P11D and the employee will be taxed on that extra payment.

Where an employee uses a company car, but pays for all the fuel, the company can pay a fuel-only mileage rate for business journeys. This fuel-only rate is guaranteed to be tax free when it is equal to or less than the advisory fuel rates set by the Taxman every six months. This advisory fuel rate has just been increased with effect from 1 July 2008, although due to the escalating fuel prices the Taxman has said the higher rates can be used for journeys made in June.

The new advisory fuel rates, with the old rates in brackets, are:
1400cc or less:     Petrol: 12p (11p)      Diesel: 13p (11p)      LPG: 7p (7p)
1401cc to 2000cc:     Petrol: 15p (13p)      Diesel: 13p (11p)      LPG: 9p (8p)
Over 2000cc:     Petrol: 21p (19p)      Diesel: 17p (14p)      LPG: 13p (11p)

These rates are based on average fuel prices per litre of 114.8p (petrol), 127.2 (diesel) and 57.1p (LPG). If the prices in your local area are much higher, or your company cars are less fuel efficient than average, you can pay a higher mileage rate. You need to keep a note of how you calculated the higher mileage rate.