The tax system is undoubtedly complex, but this complexity shouldn’t deter you from keeping your taxes as low as possible, as well as maximising your net income. In this article, we look at pre 5th April tax planning opportunities that are available to avoid any unnecessary extra tax.
Please note, everyone’s tax situation is different, so the areas we talk about may not be applicable to you or your situation. If any of these areas interest you, please contact us and we will happily discuss them further with you.
Tax-Relievable pension contributions
Before 5th April 2019, you should consider making full use of the Annual Allowance. The Annual Allowance for making tax-relievable pension contributions is currently £40,000 for individuals with earnings below £150,000. This is then tapered down to £10,000 for individuals earning over £210,000. However, it is possible to carry forward unused Annual Allowances from the previous three tax years, so with a little planning, it may be possible to receive tax relief in the current tax year on contribution well in excess of £40,000.
Individual Savings Accounts (ISAs), Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) are classed as ‘tax-favourable investments’ and should be considered. Up to £20,000 per person and up to £40,000 for a married couple can be invested into an ISA during the 2018/19 year.
For the tax year ending 5th April 2019, annual income of less than £11,850 is not liable to tax, so it is important that each spouse uses their full Personal Allowance for income tax purposes. It should be considered for civil partners and married couples to transfer income producing assets to ensure that personal allowances are not going to waste. There is also the ability to transfer a proportion of the Personal Allowance to your spouse if certain conditions are met.
Personal allowance for high earners
For every £2 that your adjusted net income is above £100,000, your Personal Allowance will go down by £1. If your income is £123,700 or more, your allowance is zero. If you have income that falls within this band, the effective rate of tax is 60%. Pre tax year end planning such as pension contributions or gift aid donations, can help reduce taxable income so that the maximum tax relief can be obtained.
Gifts up to £3,000 per annum are exempt from inheritance tax (IHT), there are additional exemptions for gifts in consideration of marriage. Regular gifts out of income can also be exempt from IHT. You should ensure these exemptions are reviewed on a regular basis, especially in the lead up to tax year end.
Capital gains tax
If an individual sells an asset (such as property or shares), they will pay capital gains tax (CGT) on any gain in excess of the annual exemption, which is currently set at £11,700 for the tax year ended 5th April 2019. However, as both spouses have their own CGT exemption, with careful planning assets can be transferred so that effectively a couple can realise gains of £23,400 before CGT is payable.
Usually when an asset is transferred from one owner to another this can potentially trigger a CGT liability; however this does not normally apply when switching ownership between spouses or civil partners. By transferring assets between spouses, it can be possible to make use of a spouse’s lower tax rate or unused annual exemption. It is important that tax advice is sought prior to any asset transfer or sale as there are pitfalls to avoid and there may be reporting requirements.
For company shareholders, the dividend rules allow the first £2,000 to be taxed at 0%, irrespective of what tax band you fall into. A pre year end dividend should be considered if this 0% band hasn’t yet been maximised. Furthermore, by transferring shares to your spouse and paying them a year end dividend, you could double the £2,000 0% tax band.