Now is the best time to make sure you take advantage of all the tax-saving allowances available to you before the end of the tax year.
We’ve put together a list covering the key things you should be looking at right now to make sure your tax planning is as effective as possible.
We cover 5 key areas
- Income Tax
- Income Tax Reliefs
- Capital Gains Tax
- Investments
- Inheritance Tax
This blog will ensure that you make the best decisions so that you don’t pay any more tax than you need to. Don’t miss out by failing to take action before the 5th April!
1. Income Tax
The most common and widely known income tax allowance to consider is your personal allowance. Where possible, you should take all steps necessary to ensure this is fully utilised for you and your family.
Following the personal allowance, the next source of tax-free income to consider is the dividend nil rate band. If you are in control of distributions, on any shares that you own, now is the time to ensure that you have declared at least up to the top of the dividend allowance in dividend income.
Ensuring that you utilise the basic rate band will ensure that you pay the lowest rates of tax whilst maximising your income.
If your lifestyle and personal situation takes you into the higher rate band, tax rates are not to be feared but may be best managed if kept below the £100k threshold, a point in which the marginal rate of tax can reach an eye-watering percentage.
The personal savings allowance (PSA) introduced a few years back allows savers to earn tax-free interest. Ensuring that earning interest on your excess cash is no longer taxing!
If you are married or in a civil partnership, you may qualify for the married couples allowance. This is the case if one of you is earning below the personal allowance threshold each year with the other spouse/partner earning up to the top of the basic rate band. The maximum personal allowance available for transfer is 10% of the personal allowance which would give rise to a potential tax saving of £250.
2. Income Tax Relief
Personal pension contributions are an effective way of reducing your tax bill whilst maximising your retirement income. The maximum you can invest in a personal pension is the lower of relevant annual earnings and £40,000. If there are unused allowances from the previous 3 years, these may be available.
This relief can assist by extending your basic rate band, meaning more income is assessed at the basic rate of tax. It can also work by adjusting your annual net income to fall below £100k ensuring you don’t run the risk of losing your personal allowance.
It may be more effective to make pension contributions straight from your company as by doing that you can reduce the amount of corporation tax your company will need to pay.
Advice should be sought to ensure you are making the optimal decision based on your allowance capacity and personal circumstances.
Gift aid is often overlooked when considering the year-end. Many of us tick the gift aid box on charity donations to ensure that the maximum benefit can be claimed from our acts of kindness. What happens next? If you don’t keep a log and then there’s a chance you’ll forget to claim the gift aid relief via your self-assessment tax return, resulting in handing over more tax than you need to.
Gift aid relief works in the same way as personal pension contributions by extending your basic rate band and relieving tax at the basic rate rate.
Much like pension contributions, gift aid is an opportunity to reduce tax for those with control over their income. However, these tax reliefs are only available to those paying rates in the higher and additional rate bands.
3. Capital Gains Tax
Each year there is an annual exemption for capital gains tax below which you do not pay any tax. If you are thinking about making capital disposals, making them before the 5th of April will ensure you do not lose your annual exemption.
This is particularly effective if you have a share portfolio where you are looking to liquidate shareholdings by structuring disposals over a number of years.
Care needs to be taken so that you don’t fall foul of bed and breakfasting anti-avoidance provisions.
4. Investments
Income earned on ISA accounts is tax-free and not in scope for personal tax. If you have not utilised your annual allowance for and have savings that are earning you interest, you may consider transferring funds to your ISA investments to reduce your tax bill.
Lifetime ISA’s may also be something you are keen on looking into, particularly pertinent for first-time home buyers and those saving towards retirement. The government currently offers a 25% bonus on sums invested. This means that for every £1k invested the government will top up the balance by a further £250. This scheme is available to open for 18-40-year-olds and must be used for pension purposes or to purchase a first home. Any amount invested in a Lifetime ISA counts towards your annual ISA savings allowance.
Tax-advantaged investments such as SEIS and EIS investments are becoming more commonplace. The tax breaks on these investments are generous and can relieve income tax liabilities of 50% and 30% respectively. This means that up to 50% of your investment may be wiped off of your income tax liability in the year of subscription or the prior year if you elect to do so.
Please note that we are not qualified to give investment advice so if you are intending on making investments to maximise your income/tax allowances, we advise you to first get in touch with your Independent Financial Advisor.
5. Inheritance Tax
The annual allowance for tax-free gifts has remained unchanged and now is the time to consider if you are in a fortunate position and would like to redistribute excess wealth to family members.
Every year you are entitled to make a tax free gift. Gifts in excess of the annual exemption would become a potentially exempt transfer and would attract inheritance if you die within 7 years.
Using this exemption annually can ensure a saving on inheritance tax and ensure that your wealth is transferred to your nearest and dearest, tax-free.
Any questions? Get in touch!
We know Tax can be confusing, that’s why we’re here to help! If you have any questions at all please contact your Client Manager or click here.