As Mark Twain once said, the only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.
So how do we ensure we can save our skins?
With the end of the tax year looming fast, it is important to ensure that, if we have not done so already, we take the time to carry out a review of our tax and financial affairs to identify any tax planning opportunities as soon as possible. It also presents us with a great opportunity to look ahead and make sure we are fully prepared not just for the current tax year, but also the next tax year.
Here are some things to consider before the new tax year starts on 6 April 2019:
Reduce taxable income:
At this stage in the tax year the most common methods for reducing income are by making pension contributions and/or making donations to charity under gift aid. But why would you want to? Below we consider the effect on individuals with income between £100,000 and £123,700, as well as those individuals wishing to claim child benefit.
Individuals with personal income over £150,000 are taxed at a top rate of 45%. However, the effective top rate is 60% for those with an income between £100,000 and £123,700. This is because in addition to paying 40% tax on any income above £100,000, there’s the impact of losing some or all of the personal allowance and paying 40% tax on that income as well. Therefore, individuals with an income close to these amounts should consider reducing their income to below £100,000. For example, someone earning £123,700 and contributing £23,700 into a pension will save £14,220 in tax.
Another important income threshold is the one that governs the entitlement to Child Benefit. If either you or your partner has an income of more than £50,000 a year before tax, then you’ll have to pay back some (or all) of your Child Benefit in the form of extra income tax. If either you or your partner have income of more than £60,000 a year before tax, you will have to repay all of your Child Benefit as income tax. Therefore, it makes sense for individuals with children under 16 to consider reducing their taxable income if it falls within the £50,000 to £60,000 band.
Speaking of pensions:
With the Chancellor’s Spring Statement due to be delivered on 13 March, time may be limited for higher earners to make the most of pension tax relief before the government moves the goalposts.
If you are earning, you can only contribute as much as you have earned, currently up to a limit of £40,000. If you have not maximised your pension contributions in the last three years, you may also use any unused contributions allowance. Therefore, if you have earned enough, you could invest as much as £160,000 into your pension before the tax year ends.
Even if you and your spouse are not earning anything you can still contribute £2,880 each tax year into a pension, and you can also do this for your children and grandchildren. The government tops this up to £3,600, so it is worth considering.
Consider topping up your state pension:
If you have a gap in your National Insurance record, you should consider paying voluntary National Insurance Contributions to plug these gaps, and ensure you receive the maximum amount of State Pension. After 5 April the costs of paying voluntary NICs are due to rise by as much as £153 a year. If you are affected it makes sense to take advantage of the more favourable rates now as you’ll then get the same amount of State Pension for less cost. However, you should check with HMRC that filling any gaps will boost your state pension before taking action.
ISA Allowance – Use it or Lose It:
It is possible to invest up to £20,000 into an ISA for 2018-2019, and £4,368 into a Junior ISA. The tax benefits are that any future income and gains are free of personal tax. Furthermore, the cost of investing in an ISA is no greater than holding the same investments another way.
Be clever with your capital gains allowance:
Each individual is able to realise capital gains of £11,700 completely free of capital gains tax (CGT), meaning a married couple can realise gains of £23,400 free of CGT. In most cases, any transfers of assets between married couples are free of both inheritance tax and capital gains tax; therefore this should be considered where both annual exemptions can be used.
In addition, some individuals may have capital losses carried forward from earlier years to use.
There are plenty of ways to reduce CGT bills, for example, through the ‘bed and ISA’ option – a common form of CGT planning where investors sell investments or assets, use their annual CGT exemption and then buy the assets back within a tax-efficient ISA in the new tax year, thereby ‘washing’ out the capital gains.
Limit inheritance tax:
First things first, do you have a will and if so is it up to date and does it reflect your current circumstances?
Recent research has found that over 50% of UK adults don’t have a will, and over 5 million people do not know how to make one. It is important that your will reflects your current circumstances including changes in family members, ownership of assets etc. Also bear in mind that overseas properties need to be covered by a separate will.
There are many ways to reduce your potential inheritance tax (IHT) bill. Most people are aware that you can gift money without any IHT implications, as long as you survive for another seven years after making the gift. However, some gifts are immediately IHT exempt.
There is an annual exemption allowing each individual to gift up to £3,000 each tax year, and you can carry over any unused allowance from the previous year, enabling you to potentially gift up to £6,000 in a tax year.
Parents and grandparents can give up to £2,500 and £5,000 respectively to each grandchild who marries without the gift being counted as part of their estate. Regular gifts, for example for birthdays, are also allowed, as are any number of small gifts up to £250, provided you have not already given the recipients exempted gifts in the same tax year.
Gifts to registered charities and political parties are tax exempt.
Another way to exempt a gift from IHT is to make the gift out of regular income. Unlimited amounts of surplus income can be gifted during your lifetime, as long as this is not at the expense of your usual standard of living.
It is advisable to keep a formal record of the IHT-exempt gifts you make, as HMRC may require proof of your intentions.
With the current amount of political uncertainty, tax rules may soon change, so it makes good financial sense to take advantage and save your skin from the tax man while you still can.
There are only a few weeks left in the current tax year in which to act. This article only covers a few pointers and as tax planning is a complex area, it is worth seeking the advice of a reputable independent financial adviser or financial planner. We would be delighted to assist you with any tax planning needs so please do contact us to help.
Author: Alison Nagle
Alison Nagle is a Chartered Tax Adviser with over 20 years’ experience within the accountancy and wealth management sectors. She joined PMW in January 2018 as our in house tax manager and provides support and advice both internally and externally.