Year end tax planning- act now to maximise your relief.
Now that last year’s tax return has been filed, please do take some time to consider undertaking some year end tax planning to make sure you have made full use of any reliefs or exemptions that might be available. Here is a quick reminder of some of the more common areas to consider:
Tax rates and personal allowances – An individual has a personal allowance of £10,600 in 2015/16, which means any income up to this amount is tax free. Any additional taxable income is taxed at between 0% and 60%, depending on the income source.
Once your taxable income goes over £100,000, the tax free personal allowance is reduced by £1 for every £2 over £100,001. This means that income between £100,001 and £121,200 is effectively taxed at 60%, with income over £150,000 being taxed at 45%.
Making pension contributions or gift aid donations will reduce the rate at which your income is taxed and so well timed pension or charitable payments could save you tax of up to 60%.
Tax free investments – Make sure you are making the best use of ISA/National Savings/Venture Capital Trust/insurance bond investments to give tax free income sources, or a return of capital taxable at 28%. Remember there is now a new Help to Buy ISA which the Government will add up to £3,000 tax free to help savers get on the property ladder for the first time. Some easy year end tax planning could help someone in your family get on to the property ladder!
Gifting assets – Alternatively, consider transferring income producing assets to your spouse/partner if they have lower income than you, removing income from your higher tax rates. Income earned from jointly owned assets is automatically taxed equally, even where the asset (other than shares in a family company) is not owned equally and so you only need to give away a 1% interest to your spouse for them to be taxed on 50% of the income.
High Income Child Benefit Charge – Where you or a partner receive child benefit, a claw back of the benefit is made where either person has taxable income of more than £50,000. Taxable income may be reduced in the same way as above to help minimise any claw back.
Pension contributions – Provided you have enough “relevant earnings” in the year, it may be tax efficient to make or increase pension contributions before 5 April 2016, especially where you have unused relief brought forward from the previous three years. For those with little or no relevant earnings (basically, employment or self employment income), a contribution of up to £2,880 net (£3,600 gross) may be made.
Employers can also contribute to your fund which can be done under a salary sacrifice arrangement, saving you both tax and national insurance. Such contributions are not capped by relevant earnings.
Further changes to the pension relief rules are anticipated in the forthcoming Budget and so please do speak with our Financial Planning team to make sure you are maximising your pension reliefs.
Family pension contributions – not only can you or your employer pay contributions to your pension fund, but other family members can as well, such as your parents or grandparents.
Provided you have enough relevant earnings, family pension contributions will reduce your taxable income, which is a useful way to help keep your income below £50,000, retaining full child benefit entitlement where you do not have the funds spare to pay into your own pension pot.
These contributions also have the added benefit of saving your family member inheritance tax, either by being a gift out of normal income, or by being within the annual exempt amount.
Say you have taxable income of £60,000 and receive child benefit for 4 children totalling £3,213. If your parents paid £8,000 into your pension fund (grossed up in your fund to £10,000), your adjusted income falls to £50,000, meaning no claw back of your child benefit. This saves you tax of £5,213 and your parents £3,200 in inheritance tax: so a cash outlay of £8,000 will save you and your family tax of £8,413, which means your family makes a net saving!
Spouses/Partners – If you run a business, consider employing your lower earning spouse as a way to pass income across to them, saving you tax as a couple. Do make sure though that payments are physically made and are commensurate for work carried out by them, otherwise the arrangements may be challenged by HMRC.
You could also consider making your spouse either a partner or shareholder in your business, although if they are a shareholder, make sure they own at least 5% of the voting rights in the company and are either an officer or director to protect valuable entrepreneur’s relief on any eventual exit from the business.
Dividends – Consider timing dividend payments so higher income is received in one year, and lower income is received in the following year. This measure could help protect against the loss of either your personal allowance or any child benefit in alternate years.
Dividend tax rates are increasing from 6 April 2016 and so it may be worth advancing dividends to save tax.
Repairs and capital – For unincorporated businesses, accelerate expenditure to help reduce profits to retain personal allowances and child benefit. Businesses may currently spend up to £200,000 on capital equipment in an accounting year and receive tax relief in full in the year of spend. This limit (the Annual Investment Allowance) reduced from £500,000 on 1 January 2016 and complex rules apply for periods straddling this date, so please do take advice before committing your business to a high capital investment.
Loss restrictions – Careful planning is needed on the use of losses due to restrictions on relief applying. Relief on trading and certain other losses is now restricted to the higher of 25% of net income and £50,000 per annum. Please do take advice if you anticipate making losses to ensure your relief is maximised.
If you would like to talk to use about year end tax planning and the opportunity to maximise available relief, please do not hesitate to get in contact with our expert Tax Team.