Year-end tax planning

There is a rush every year for many to make the most of tax reliefs available to them. It’s important to take the time to give your finances a tax year-end check-up.

Are you making the most of the tax reliefs and allowances available to you? Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

Here are some of the key areas that could help you make the most of your money and ensure that you don’t miss the chance to make the most of valuable tax-efficiencies and allowances in your tax year end planning.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax reliefs are dependent on individual circumstances.

We look at problems from various perspectives and find unexpected solutions.

Many taxpayers were relieved that the recent UK budget offered little in the way of changes to the taxation of individuals, despite concerns to the contrary. We therefore face a UK tax year end much like any other, offering a variety of things to consider, even for foreign citizens living in the UK.

Key points:

  • Make the most of your Individual Savings Account (ISA) allowance.
  • Bed and breakfasting of shares on an individual basis no longer exists but there are alternatives.
  • Is there enough income to use the personal allowance?
  • Can income be allocated more beneficially between spouses and civil partners?
  • Maximise higher rate pension relief, particularly when personal allowances are restricted.
  • As well as being charitable, payments under gift aid can reduce total income.

Let’s take a look at some ideas and see what you can do to make sure you’re ready to finish the tax year in top form.

However, please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

Individual Savings Account (ISA) allowance

The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple could put away £40,000 before the 5th April. ISAs are subject to allowances that cannot be carried forward i.e. if you don’t use your annual ISA allowance before the end of the tax year, you lose it forever.

You can split your yearly allowance between cash ISAs and stocks and shares ISAs. With cash ISAs, the interest is tax free. With stocks and shares ISAs, including the Lifetime ISA, there is no tax to pay on income or capital gains from your investments, making these accounts useful for building long-term wealth.

Lifetime ISAs (LISAs) and Help to Buy ISAs

Lifetime ISA (LISA): Individuals between the age of 18 and 40 can open a Lifetime ISA, which has a 25% Government bonus up to a maximum of £1,000 per year – for example a maximum saving of £4,000 a year into a Lifetime ISA will become £5,000 with the bonus. You can put in up to £4,000 each year, until you’re 50.

Help to Buy ISA: You cannot open a Help to Buy ISA now. However, if you already have a Help to Buy ISA, you will be able to continue saving into your account until November 2029. Help to Buy ISA scheme was for younger generations hoping to climb onto the property ladder, in which the government will also top up any savings by 25%, with a maximum contribution of £3,000, towards the purchase of your home. The minimum government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy ISA before you can claim your bonus. The maximum government bonus you can receive is £3,000 – to receive that, you need to have saved £12,000.

Maximise your annual pension allowance

Contributions to pension schemes can offer tax savings, but it is important to ensure that the contributions do not exceed the annual allowance which is £60,000. The annual allowance reduces gradually by £1 for every £2 of ‘adjusted income’ over £260,000, to a minimum of £10,000.

The allowance is said to be ‘gross’ of tax, both employer and employee contributions count towards the limit and any excess contributions are subject to an Income Tax charge. With all that in mind, and before rushing into an additional contribution before year end, please do seek professional advice in respect of how much annual allowance you have available for use. It can be a complicated calculation.

Importantly, if you do not use all of your allowance in a particular year, it can be carried forward for up to three years. But you need to have been a member of a registered pension scheme in order to utilise an unused allowance.

Capital Gains Tax (CGT) allowance

Every individual has an annual CGT allowance which currently enables them to make gains on investments of up to £6,000 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% (plus 8% surcharge for chargeable residential property) depending on the individual’s other total taxable income in the year the gain arises.

If unused, the allowance can’t be carried forward into the next tax year, so it’s advisable to use this tax-free allowance each year in order to reduce the risk of incurring a significant CGT bill in future years.

By checking your CGT exposure each year, you could reduce future liabilities. If appropriate, consider what’s known as a ‘Bed and ISA’ transaction. This is useful for investments held outside a tax-efficient ISA or pension, where there might be a CGT bill in future. By selling some or all your assets this year and then immediately buying them back within an ISA, you can use this year’s CGT allowance to move your investments into a tax-efficient environment. It’s important not to realise a profit above the CGT allowance, or to sell more of the investment than you can buy back within your ISA allowance of £20,000, assuming you haven’t used any of it for other purposes.

Capital losses are offset against capital gains when realised in the same tax year. If you own an asset that is currently sitting in a loss position, consider the timing of this disposal and the positive impact it could have on your overall Capital Gains Tax position.

Inter-spouse transfers are generally free from capital gains and the original base cost is usually retained. Where one spouse or civil partner has not fully utilised their annual exemption, consider a gift followed by a sale in the hands of the recipient to maximise available reliefs.

As always, if you own assets overseas you should be aware of the exchange rate fluctuations that may have occurred since acquisition. The resulting gain or loss in pounds sterling can sometimes be unexpected.

Avoiding that 60% income tax rate

The personal (tax free) allowance of £12,570 is tapered down by £1 for every £2 of income in excess of £100,000, giving an effective rate of a eye-watering 60% tax on income between £100,000 and £125,140 (40% income plus 20% income tax relief lost).

If your income is approaching this threshold as you move towards the tax year end, it may be prudent to consider if you can take steps to reduce your taxable income. These steps may include tax relievable pension contributions, charitable donations and controlling the point at which you receive relevant types of income over the next few weeks.

Personal savings allowances & Dividend allowance

For savings held outside pensions and ISAs, the government gives other allowances. These include the Personal Savings Allowance: a tax-free allowance for interest payments. It is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers but doesn’t apply to additional-rate taxpayers.

The tax-free dividend allowance is up to £1,000 per tax year. It’s important to make sure you’re making the most of this if you are in a position to.

Where appropriate, taxpayers should also consider dividends over a bonus or salary. A bonus or salary is generally tax deductible for the company, with up to 25.8% in combined employer and employee national insurance contributions (NICs). Dividends are free of NICs when paid.

Inheritance Tax (IHT)

Non-UK domiciled individuals are subject to UK IHT on their UK assets. UK domiciled individuals, or long-term residents of the UK who are deemed domiciled, are subject to UK IHT on their worldwide assets.

An individual has a £325,000 ‘nil rate band’ for UK IHT purposes and any unused amount can be transferred to a surviving spouse. We recommend that wills are reviewed on a regular basis and after any significant events.

Take advantage of exemptions. You can give away up to £3,000 a year, which is known as your ‘annual allowance’, and this will be immediately exempt from IHT. This exemption can be carried forward for one tax year if unused and so it is possible for a married couple to gift away as much as £12,000 using the annual exemption, on the basis neither of them has used the exemption already in the current or previous tax year.

In addition, lifetime gifts to any person that do not exceed £250 in a tax year are exempt. Furthermore, lifetime gifts in consideration of marriage are also exempt – for example, parents can gift £5,000, grandparents can gift £2,500 and gifts of up to £1,000 can be paid from others.

Tax efficient Investments

If you are a higher-rate or additional-rate taxpayer who can tolerate a high level of investment risk, you could also consider more complex tax-efficient investments such as Venture Capital Trusts, the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).

These offer generous tax breaks (income tax and CGT) to offset the added risks of investing in smaller, younger and unquoted companies.

Use your Spouse’s Personal Allowance

If your spouse is a lower or even non-taxpayer and you have income producing assets (for example, buy-to-let property or even saving accounts), you could put these in their name to lower your overall Income Tax liability.

Married couples and registered civil partners who are basic-rate taxpayers and have not fully utilised their personal allowance can transfer 10% of the basic personal allowance to their other half.

Assets can be passed between couples without any CGT liabilities. Transferring assets to joint names can also ensure that both spouses’ annual CGT exemptions are fully utilised in a sale.

Think about the children

The Centre for Economic and Business Research has quantified the cost of bringing up a child from birth to the age of 21 as almost a quarter of a million pounds.

There are several ways parents and grandparents can put money aside for descendants. The Junior ISA (JISA) is perhaps the most popular. Less well-known is that children can also have a pension fund as soon as they are born – and setting one up can bring significant tax advantages. More than 10,000 children already have pension plans in place, according to HM Revenue & Customs.

Junior ISA (JISA); Junior Individual Savings Accounts (JISAs) let children save and invest too. The tax-efficient JISA allowance for the current tax year is £9,000 per child. With no tax on the earnings, the money put away can grow even faster, enabling them to purchase a property later in life or fund a university degree. A family of four (two adults and two minor children) investing the maximum into ISAs could save up to £58,000 in the current tax year.

Junior SIPP: Junior SIPP (Self Invested Personal Pension) is a tax-efficient way to build a retirement nest egg for your child. The Junior SIPP allowance for the current tax year is £3,600. Control of the pension passes automatically to your child at 18, however the money is locked away until retirement age (usually 55). Even if your child is a non-taxpayer, they will still get basic-rate tax relief on contributions. That means a maximum of £2,880 a year is automatically grossed up to take account of tax, giving an annual investment of £3,600.


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