Keeping Up With Ms Jones’ – Tax Planning
Why pay more tax than you need to? Laura shares top tips for end of year tax planning
With 31st of January being the deadline for self-assessment the Astute Office has been awash with client tax returns for 2015/16, however when it comes to tax it’s important to forecast your potential liability and take whatever action possible to minimise the impact before the tax year end.
With April 5th 2017 in close proximity here are a few areas to consider for Tax Planning before it’s too late:
Tax Band Straddling
Are you likely to fall into a higher Income tax bracket this tax year? Either from being a non-tax payer to basic rate (20%), basic to higher rate (40%), higher to additional rate (45%) or is it possible that your income might fall into that awkward level of between £100,001 and £122,000 that will cause a loss of your personal allowance? If so there may be the opportunity to extend your basic and higher rate tax band with a pension contribution or charitable giving. You might be able to use the unused tax banding of a lower income paying spouse by transferring income yielding assets to them.
The Marriage Allowance
If you’re married or in a civil partnership and one spouse is a non-tax payer whilst the other is a basic rate tax payer, then you have the opportunity to switch up to £1100 of unused personal allowance for income tax to the tax paying spouse. This ultimately results in a tax saving of £220 in the tax year. Every little bit of Tax Planning helps.
Gains with a Sting in the Tail
You may have capital gains that would suffer tax at 28% or 20% (depending on whether the gain relates to property) in this tax year and 18% or 10% in the next tax year or vice versa so if you are yet to realise a gain consider whether it would be better to do so now or after 6th April.
You have a Capital Gains Tax Annual Exemption of £11,100 but this is lost if not used in the relevant tax year. As part of our ongoing investment planning we will look to utilise this allowance for you by realising gains within your investment portfolio.
If you are likely to realise a capital gain of some sort (through shares, property, investment portfolios hidden under the bed) please let us know.
On the flip side if you have realised a loss in the current tax year we can also claim this loss for future use to offset against gains.
We Never Tire of the ‘P’ Word
The maximum tax relievable contribution to a pension is the lower of your relevant earnings or £40,000. However if you are keen to make a higher pension contribution you do have the facility to carry forward unused annual allowances from the previous three tax years.
If you have no relevant earnings in the current tax year it will still be possible to contribute £2880 net and tax relief will make your contribution up to £3600. This can be done for anyone whom you would like to help with their pension planning like children or grandchildren – they will certainly thank you in retirement even if they don’t see the benefit now.
As an employer you might want to benefit yourself or your staff with corporation tax relievable contributions to pension.
High Earners Beware
The tapering down of the annual allowance for pensions for those earning over £150,000 per annum was introduced in April 2016. This means that those earning between £150,000 and £210,000 will have an annual allowance for pension contributions of anything between £40,000 and the £10,000 minimum. This makes the ability to carry forward even more important as the tax year 2013/14 carried an annual allowance of £50,000 that will be lost to you from April 2017.
Alternative Tax Allowances
If you’ve made considerable gains in the tax year or your pension planning options are limited due to high earnings it might an idea to consider an investment into an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT). Both options hold income tax and capital gains tax incentives to encourage investors into investment in new companies or industries. They don’t come without risk and aren’t for the faint hearted however they could play a role in your end of year tax planning.
Maximise your ISA
The use of an ISA tax wrapper allows us to make savings and investments free of income tax and capital gains tax. You have the opportunity to invest or save up to £15,240 into either a stocks and shares or cash ISA in the 2016/17 tax year. If you have an existing investment portfolio we will be contacting you (if we haven’t done so already) to confirm if you would like to move some of this portfolio into a more tax efficient environment, moving investment capital into ISA’s can also help to utilise your Capital Gains Tax Annual Exemption. If you are unlikely to use your investment ISA allowance this year make sure your cash savings can benefit from tax free growth. Your children and grandchildren also have a Junior ISA allowance of £4,080 per child. A family of four could wrap up to £38,640 before end of the tax year.
If you’ve made a withdrawal from a cash ISA during the tax year, then there is the chance that you can top back up to your full ISA allowance before the 5th April.
The Joy of Giving
If Inheritance Tax is an issue you have an annual gifting allowance of £3000 exempt from IHT. You can carry back to the last tax year but no further. So, if you’ve been reluctant to give freely, it may be worth making a pension contribution on behalf of another or even a junior ISA. As a couple you can gift £6000 a year and save £2400 in inheritance tax.
You can also make small gifts of up to £250 to as many people as you want in the tax year as long as you don’t gift to the same person twice.
As Financial Planners we look to cover these areas in your regular review however, if something has changed since our last meeting, please let us know and we will do the best to take advantage of your allowances and reliefs before 5th April 2017
Laura Jones APFS
Chartered Financial Planner
Note: No Director, representative or employee of Astute Wealth Management Ltd. accepts liability for any direct or consequential loss arising from the use of this document or its contents.
Tax planning is not regulated by the Financial Conduct Authority. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
Tax rates and figures are applicable at the time of writing this article and may not be applicable at the time of reading.