The new tax year is fast approaching, so our tax guru, Lesley, has penned the seven deadly sins of tax planning to help you get set for the 5 April 2019!
1) Forgetting pension contributions
Since the introduction of greater flexibility, investing in a pension is one of the most tax efficient ways to save for your future. Pension contributions currently receive up to 45% income tax relief, 20% of which is added automatically and the balance is claimed via your self-assessment tax return.
There are many rumours that higher rate tax relief on pension contributions will be withdrawn or capped, but as yet no such restriction has been introduced.
Broadly, those under 75 can contribute as much as they earn per tax year, up to a maximum of £40,000 for most people. Anyone earning over £100,000 should check their maximum contribution with their advisor.
If your spouse is not earning you can also fund a pension for them. Non-earners can contribute up to £2,880 per tax year, and the Government will add £720 in tax relief, bringing the total to £3,600 even though the individual pays no tax.
The same idea can also be used to fund a pension for your child, though this may not always be the best option due to the restriction on access until age 55.
2) Not making best use of the personal allowance and tax bandings
If you have a non-earning spouse or adult child you may want to review income allocation to make sure that their personal allowance (currently £11,850) and their basic rate tax band (currently £34,500) is utilised, particularly if you are a higher rate taxpayer.
Transfers of assets and investments can be made between spouses tax free. The same does not apply to transfers to adult children and so care will be needed not to trigger any tax liabilities as a result.
HMRC usually assume that rental property owned by spouses is owned 50:50 and so will expect the rental income to be taxed in the same proportions. It is possible to amend this if, for instance, it is preferable for all rents to be taxed on one spouse, however further tax advice should be sought first
3) Failing to use the tax free dividends and savings allowances
At present each individual has a tax-free dividend allowance of £2,000 per tax year. Over and above this the tax rates on dividends depend on the level of your other income, 7.5% for a basic rate tax payer, 32.5% for higher rate and 38.1% for additional rate taxpayers.
So if you are a business owner, and you have enough distributable reserves, you should be looking to pay a dividend up to £2,000 to make use of the allowance. If the cash is not available to pay the dividend it can be left in your loan account and drawn when funds permit.
4) Not making use of your annual capital gains tax allowance
Each of us in entitled to generate capital gains of up to £11,700 (in 18/19) before we pay any capital gains tax on them. The allowance does not carry forward and so it makes sense to use it up each year. It will apply to sales of investments, shares and also properties, though any capital gain made on your home should be tax free regardless.
If you are a basic rate taxpayer you will pay 10% on any gains over and above this, higher or additional rate taxpayers pay 20%. The rates increase by 8% if the gain is made on the sale of residential property.
Remember also that timing is everything. If you have an investment standing at a gain of £23,400, selling part in 2018/19 and part in 2019/20 will save you capital gains tax of £2,340, based on the £11,700 allowance.
5) Forgetting to top up your ISAs
Over 10.8 million people contributed to an ISA last tax year. If you are over 18 and UK resident, you can contribute up to £20,000 to a stocks and shares ISA this tax year, and your investment will grow tax free.
For those under the age of 40, there is also the lifetime ISA or LISA. LISA allows you to contribute up to £4,000 from your ISA allowance each tax year, until age 50, and get a 25% bonus from the Government each year. The money can be withdrawn tax free when purchasing an eligible first home or after age 60. Other withdrawals attract a Government charge.
6) Not making annual gifts to reduce your estate for inheritance tax
We all have an annual allowance that we can use to make gifts to reduce our estate for IHT purposes, without this being added back into our estate if we die within 7 years.
The allowance is currently £3,000 per tax year. If the allowance is not used in whole or in part, it can be carried forward to the following tax year only, then it is lost.
You can also make as many gifts of up to £250 as you like, but this is an exemption not an allowance. If you gift £400 to one person, the £250 does not apply to reduce the value of the gift for IHT purposes down to £150.
7) Forgetting to consider enterprise investment scheme / Venture capital trusts when you have a large income tax bill
If you have a large income tax liability and have cash to invest, you might want to consider using the enterprise investment scheme (EIS) or a venture capital trust (VCT).
These investments attract income tax relief and often carry other tax incentives, such as tax free disposal. For instance, if you invest under EIS then you will receive income tax relief at a rate of 30% and the investment will be free from capital gains tax when sold.
There are a number of conditions to be met for the relief to apply, and typically you would invest via a product provider. This type of investment is not for everyone, as it tends to carry more risk, if you are interested you should speak to a financial advisor.
If you’ve read this and think you might need some support with next year’s tax planning, feel free to contact Lesley at firstname.lastname@example.org