Summary of 2011/12 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 penalties
New compliance powers
New tax rates
Pension contributions restriction

New tax penalties

New penalties continue to be introduced. These can easily catch the unwary. While it is true that there have been many successful appeals to tax tribunals, equally many taxpayers have had to pay heavy penalties for being forgetful or careless.

You can now be penalised even though no tax was lost, and even though you had no dishonest intention. Remember that interest is always added to late paid tax. Unlike penalties, you cannot appeal against an interest charge.

The new message from the tax authority is, ‘Take care to avoid a penalty.'

Taxpayers who are careless can expect significant penalties. There is a penalty of at least 15 per cent for careless errors. For deliberate and concealed falsification, the penalty can be as high as 100 per cent of the tax involved. In serious cases, criminal charges may be brought.

The penalty regime is supported by various other initiatives to ensure compliance. These include visits to businesses to check the adequacy of their record-keeping, and various time-limited schemes to disclose untaxed income in return for a lower penalty.

Even where penalties might apply, however, taxpayers are encouraged to come forward and disclose understatements on returns, with significant discounts for disclosing omissions - leading to a reduction to nil for careless mistakes.

Now is a good time to get your tax affairs right up to date.

New compliance powers

Much has been written about HMRC compliance powers, which were developed to provide a more flexible, targeted approach to checking tax returns. HMRC can call for documents and information, and is entitled to visit your business premises, but take up of the new powers has initially been slow and few problems have been reported as yet.

For business owners there is much emphasis again on adequate record keeping, and you might wish to review areas of weakness in your records and take steps to introduce controls designed to show that the records are adequate as a basis for the tax return. This is particularly important for businesses accepting payments in cash. HMRC is increasing its audit of small businesses to check on their record keeping.

New tax rates

The 50 per cent additional rate of income tax remains on taxable incomes above £150,000.

It should be noted that 50 per cent might not actually be the top rate of tax next year. Those with income of more than £100,000 suffer a withdrawal of their personal allowances. For every £2 over the income limit the personal allowance will reduce by £1 until the personal allowance has been completely withdrawn, meaning that affected taxpayers will bear a 60 per cent effective rate of tax on a band of income of around £15,000.

The income for this purpose is after any reduction for pension contributions and gross charitable donations, so these can be particularly tax efficient next year.

Pension contributions restriction

The annual limit on tax relief for pension contributions has been reduced from £255,000 to £50,000. However, the new £50,000 annual pension contribution limit will be applied to each of the last three tax years and you may be able to carry forward any contributions in 2008/9, 2009/10 and 2010/11, it may be possible to contribute up to £200,000 in the 2011/12 tax year.

It is legal to make pension contributions above this figure, but no tax relief may be claimed for the excess. This is given effect by allowing tax relief at source on the whole amount and then imposing a tax charge to claw back the excess relief.

The previous plan was to restrict pension relief for anyone who earned more than £150,000 a year. The new reduced annual limit aims to have a similar effect, but achieved in a simpler manner.