End of year tax planning
With the 2016/17 tax year coming to an end, we thought this is a good time to remind you of the various opportunities available that could improve your tax position.
Personal income over £150,000 is taxed at 45%. However, because the personal allowance is reduced by £1 for every £2 of net income over £100,000, for income between £100,001 and £122,000 the effective top rate is 60%. Individuals with incomes near these thresholds can reduce their tax liabilities by reducing their taxable income below £100,000 or £150,000.
You might achieve this and other reductions by changing income into non-taxable forms, deferring income, making pension contributions, making payments to charity or giving income yielding assets to a spouse/civil partner with lower income.
The new personal dividend and savings tax free allowances were introduced such that £5,000 of dividend income is tax free for all taxpayers and £1,000 (£500) of savings income is tax free for basic rate taxpayers (higher rate taxpayers).
For the 2016/17 tax year you are able to contribute up to £40,000 (gross) into a pension scheme. This allowance may be reduced for any individuals whose income is in excess of £110,000, for full details of this abatement please see this month’s article on “the new restrictions to the annual allowance for pension contributions.”
Pension contributions attract basic rate tax relief at source and therefore the £40,000 contribution only requires a £36,000 payment.
In addition the pension contribution increases your basic rate threshold and therefore if you are a higher or additional rate tax payer you will receive additional tax relief on the contribution made via your tax return.
Furthermore, the pension contributions effectively increase the threshold at which your personal allowance is reduced and Child Benefit is clawed back.
Therefore if your income is in excess of £100,000 and your personal allowance is reduced pension contributions can preserve part or all of your personal allowance depending on your circumstances. For anyone with income between £100,000 and £122,000 pension contribution can be provide tax relief at an effective rate of 60%.
If you have held a pension scheme in previous years and did not fully utilise your allowance in any of the previous 3 tax years any unused allowance is available this year. Contributions are first allocated against your current year allowance and then the prior years on an earliest first basis. Therefore any unused allowance from 2013/14 will be lost if not used by 5 April 2017.
The total pension contributions that attract tax relief are also capped based on your relevant earnings for the year. Therefore both your annual exemption and earnings need to be considered before making any contributions.
In addition any contributions made by your employer also count towards your allowance.
Pensions for all
Pensions legislation allows contributions to be made by, or for, all UK residents, including children.
So consider making a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even for those who do not have any earnings.
Gift aid donations work in a similar way to pension contributions in that they are also made net of 20% basic rate tax. This 20% uplift is reclaimed by the charity.
In addition as with pension contributions gift aid donations increase the threshold at which the personal allowance is reduced.
The ISA allowance for 2016/17 is £15,240, which can be placed in any combination of cash or stocks and shares ISAs. Any income and capital gains received within your ISA are tax free. This allowance cannot be carried forward, so to utilise the relief, investment must be made on or before 5 April 2017.
Capital Gains Tax
The Capital Gains tax annual exemption, i.e. tax free gains, is £11,100, in 2016/17. The exemption is available to each individual, including minor children but any exemption unused in a year cannot be carried forward.
Married couples and civil partners can transfer assets between them on a no gain/no loss basis and such transfers should be considered to ensure that the annual exemption can be fully used.
Where one spouse or civil partner is a higher rate taxpayer but the other will not have used his or her basic rate band in full, similar transfers should be considered to ensure that at least some of any taxable gain is liable at 10% rather than 20%.
It is important to ensure that any such transfer is outright and unconditional
Annual Inheritance Tax Exemption
Each tax year you are allowed to gift £3,000 without any Inheritance tax implications. Amounts greater than £3,000 are liable to Inheritance tax in general if they are gifts to an individual they can later become subject to Inheritance tax, if you died within 7 years. Any unused allowance from the previous tax year is also carried forward, and therefore, if you did not make gifts of £3,000 in the last tax year, you could gift up to £6,000 before 6 April 2017 with no IHT consequences.
Invest in a Venture capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS)
You can reduce your income tax liability by up to 30% of the amount invested in VCT and EIS shares and 50% for SEIS shares. The maximum investment that can be made per annum on which you can claim income tax relief is £200,000 for VCT, £1 million for EIS and £100,000 for SEIS shares. Income tax relief is limited to the amount which reduces your income tax liability to nil. An investment in 2016/17 can also be carried back and utilised in 2015/16 if the 2015/16 investment limit was not fully utilised.
EIS and SEIS investments also offer Capital Gains Tax reliefs, deferring capital gains that you may have incurred on other assets such as land, property, shares, etc.
These schemes are designed to help smaller companies raise capital; therefore there is an element of risk with these investments.
If you would like any further information please do not hesitate to get in touch.
This is intended as a summary and overview of the tax situation and does not constitute financial advice and no action should be taken without first seeking professional advice specific to your circumstances.