Some year-end tax planning tips

With the end of the tax year just over a month away, it’s time once again to consider any last minute tax and pension planning, to make sure you utilise the tax breaks available to you. Here’s just a few ideas and options, some of which may be appropriate for you.

The starting point is to look to use your full Isa allowance of £20,000. An ISA is free from income tax and Capital Gains Tax (CGT), but once the tax year ends there is no carry forward, so the allowance is gone forever.

With your other investments, you should look at your overall CGT position. You can withdraw up to £11,300 tax-free before the end of the tax year using your CGT allowance. Even if you don’t need the cash, you should consider taking profits up to the CGT allowance. You can then re-invest the monies, so long as you wait for at least 30 days before reinvesting in the same mutual funds.

Additionally, if you have brought forward capital losses, you should consider making sales to utilise these. Remember too that each spouse or civil partner has their own capital gains tax annual exemption. Assets can be transferred between spouses and civil partners at a value that gives neither a gain nor a loss position to ensure that each spouse utilises their annual exemption.

Another option to consider is whether it would pay you to recycle some of your savings and investments into a more tax-efficient wrapper. For example, it may be possible to withdraw money from an onshore or offshore bond and recycle it into an ISA or pension. Remember that with life assurance bonds, withdrawals of up to 5% a year are tax free.

For some, it might also be worth considering recycling some of your Isa savings into a pension to benefit from tax relief as well as the added inheritance tax protection.

On the pension’s front, currently higher rate tax relief remains, so it makes sense to maximise use of it, if you can. Subject to the caps for those earning over £150,000, investors should be looking to maximise tax relief at their 40% or 45% rate where applicable. You can also carry forward contributions in excess of the current annual allowance. Couples too should look to maximise tax relief at higher rates for both.

High earners have seen the tax relief available to them for pension contributions reduced over recent years. As things stand, the £40,000 annual allowance is reduced by £1 for every £2 of income you earn over £150,000 within the tax year, until the allowance drops to £10,000 for those earnings £210,000.

You can however reinstate some of this £40,000 allowance by making use of the carry forward rules. A large personal contribution using any unused allowance from previous tax years (up to three) could bring your income below £110,000 and restore the full £40,000 allowance for 2017/18.

Income splitting is another option worth exploring for some. Since the introduction of independent taxation, married couples (or civil partners) should review their level of taxable income received in the year to make use of tax savings by structuring their affairs to ensure that both spouses use their personal allowances and basic rate tax bands (where applicable). Inter-spouse transfers of income producing assets should be considered.

For those who get paid an annual bonus before the end of the tax year, you could sacrifice all or part of that bonus in exchange for a pension contribution from your employer. The employer and employee NI savings made could be used to boost pension funding, adding more to your pension pot for every £1 lost from your take-home pay.

It can also pay to watch that you don’t fall into the stealthy 60% tax band – ie those with taxable income falling between £100,000 - £122,000 where the effective rate of income tax becomes 60%. You could also make pension contributions, if possible, to help recover your personal allowances should this be the case.

Note also that if you (or your partner) claim Child Benefit, the amount is restricted for those with taxable income between £50,000 and £60,000. Income in excess of the latter amount reduces the entitlement for Child Benefit to nil. As with the 60% band above, this band is best avoided if possible.

You also need to think about your inheritance tax (IHT) planning. Sensible IHT planning always starts with doing the easy things, such as making use of your exemptions, as a matter of routine.

Therefore use, where possible, your £3,000 annual exemption before the end of the tax year. Any unused amount can be carried forward for one year only, which means that if you have any remaining allowance carried forward from 2016/17 it will be lost after 5 April.

You should also make use of other IHT reliefs and exemptions, such as the small gifts exemption of £250 per person, and gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren and £1,000 to anyone else).

Making larger lifetime gifts is not dependent on the tax year end. However, you might consider whether it is appropriate to make lifetime gifts in order to reduce your estate for IHT purposes. Broadly, gifts to individuals are treated as potentially exempt transfers (PETs) and are not subject to UK IHT if the donor survives for 7 years from the date of the gift.

Finally, if you are a director or owner of a small business (SME), you could be facing an increased tax bill following changes to the taxation of dividends. This situation could worsen next year when the tax-free dividend allowance drops from £5,000 to just £2,000. A pension contribution could therefore be a tax-efficient way for owners/directors to pay themselves. By making an employer pension contribution, the tax and NI savings can boost a director’s pension fund.

This article should be treated as a general guide only and is not intended either to be a comprehensive statement of the law or specific tax planning advice. No liability is accepted for the opinions it contains, or for any errors or omissions.To discuss your tax planning options and for tax planning advice, contact Kellands. 


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