Year end tax planning – time is running out
If you would like to take advantage of any year end tax planning opportunities before the end of the tax year on 5th April, you will need to take action now.
Making the most of your tax allowances for Pensions, ISAs, CGT, IHT and Income Tax, is vital to ensuring your financial affairs are organised as efficiently as possible.
To make sure of this, it’s advisable to talk to your financial advisor as soon as possible so that any actions and/or transactions can be processed in good time before the financial year end.
We have outlined some of the most popular strategies below, and as always please don’t hesitate to CONTACT US should you have any questions, or if you would like an introduction to one of the team of Independent Financial Advisors at CULLEN WEALTH
ISA allowances are £20,000 per individual, thus allowing a couple to invest £40,000 between them.
The allowances for a Junior ISA / Child Trust Fund are £4,260 per child.
Bed and ISA
If you don’t have enough cash available right now to maximise your ISA contributions, but do have other investments which are in taxable investment accounts, then it is possible to do a “Bed and ISA”. The idea is simple: you sell your non-ISA investments and then use the proceeds to buy them back immediately, but this time within your ISA using your annual tax-free allowance, meaning the assets are out of reach of the taxman.
It is possible to generate capital gains of up to £11,700 this year that will be exempt for capital gains tax, which can assist you with building more of your taxable investments into tax efficient investments. Again this allowance is per individual, and is on a ‘use it or lose it’ basis – i.e. you can’t carry this year’s allowance over into the next financial year.
Any investment gains above this amount will be taxable, at either 10% or 20% dependent on your marginal rate of tax.
The only exception is people selling second properties, including buy-to-let investments. Capital gains on these investments will be charged at 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.
The Annual Allowance is currently set at £40,000 per tax year, however your contribution cannot exceed 100% of your earnings unless you have unused relief from previous tax years.
There are some circumstances where an individual’s Annual Allowance will have been reduced to as little as £4,000 per tax year, so it is important to seek advice, as there are tax consequences if you exceed your Annual Allowance.
Making a pension contribution is an effective way of retaining some allowances and saving tax.
The lifetime pensions allowance is currently £1,030,000.
Don’t forget that you can make pension contributions for each of your children and/or grandchildren up to £3,600 gross per annum.
Pensions and Limited Companies
If you run a Limited Company and make employer pension contributions, you receive Corporation Tax and Employer National Insurance Tax relief on these contributions. So do consider whether you are able to make any additional lump sum deposits into your pension scheme to take advantage of these additional benefits.
Do note that contributions must not only arrive in your pension account before the fiscal year end, but also leave your business account before the end of your business’ accounting year if you are to take advantage of the Corporation Tax savings.
The amount you can earn tax-free before you start paying income tax is £11,850.
A basic rate tax payer will pay 20% on taxable income between £11,850 and £46,350. This means it is possible to earn up to £46,350 before you start paying tax at a rate of 40%.
Where your earnings exceed £100,000, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. This means if you earn more than £123,700 you will lose your tax-free personal allowance.
Where your earnings exceed £150,000, the additional rate of income tax of 45% is charged on all earnings above £150,000.
These tax bands will be changing in the new financial year, so keep a look out for our separate article on this.
The dividend allowance is £2,000, so if you don’t have other income you’ll be able to earn £13,850 tax-free when taking into account your personal allowance of £11,850.
All income from further dividends are taxed at 7.5% within the basic rate band of tax, 32.5% within the higher rate, and 38.1% if you are an additional rate tax payer.
If you think you could remunerate yourself more tax efficiently to take advantage of these lower tax bands, then do contact us for further information and bespoke advice.
The Personal Savings Allowance
You might be able to reduce your tax bill further if you receive income from savings.
Basic rate taxpayers can now earn £1,000 from savings before they start paying income tax on savings income, higher rate taxpayers will only start paying tax on savings income over £500.
There is no savings allowance for additional rate taxpayers.
Each individual is entitled to a £3,000 annual exemption. It may be possible to carry forward any unused annual exemption from the previous tax year so for somebody who has made no gifts, they can make gifts of £6,000 within their annual exemptions now.