04 Oct 15 Tax Saving Opportunities
The current tax year ends on 5th April, 2019. Between now and then, you need to consider what, if any, tax saving opportunities you intend to implement for 2018/19, and beyond.
If you would like to take advantage of these tax saving opportunities or discuss how we can help you to minimise your tax liability, please call us on 01625 268 482 to evaluate how we can help you.
1. Estimate your income
You should have an idea what your income is going to be for the current tax year, and how much surplus ‘cash’ you have for any tax saving opportunities. A contribution to a pension for example (see below) might change your tax band, or move you out of a higher tax band all together, and will (in most instances) reduce your tax bill. Get to grips with the annual allowances, and know where your income level falls.
By taking advantage of our quarterly VAT service at no extra cost, you will already know in advance your estimated annual income and estimated tax. You will also be able to consider short-term investment of your funds. Our service is already fully MTD compliant.
2. Maximise the current tax breaks
The cost to the government of providing pension tax relief, particularly to higher earners, remains significant. Subject to certain limits, for every 80p you pay into a personal pension, the government adds 20p in tax relief. Higher rate taxpayers can claim extra tax relief through their annual tax return, meaning that a £1 contribution can effectively cost 60p.
The chancellor resisted making any changes in the last Autumn budget, however a reduction in tax relief in future cannot be ruled out, so consider taking this tax break while it is available; there’s no guarantee that the higher rates of tax relief will be maintained into the future.
3. Carry forward for even more relief
The maximum you can contribute to all your defined contribution pensions each year while still receiving tax relief is called the ‘Annual Allowance’. If you have used up all your 2018/19 allowance of £40,000 you can use any unused allowance from 2015/16, 2016/17 or 2017/18 and still benefit from tax relief at your highest marginal rate. This is the final chance to use up the £40,000 allowance which was in place in 2015/16. If it is not used by 5 April 2019, it will be lost forever.
To qualify, you must have held a pension in each of the years from which you carry forward, and you must earn at least the amount you wish to contribute (gross) in this tax year.
4. Reduce tax and save your personal allowance
A pension contribution can also provide other tax benefits. For example, if you have a net income of £123,700 in 2018/19 you will lose all entitlement to the personal allowance; but by making a net pension contribution of £18,960 (£23,700 including basic rate tax relief) you could bring your taxable income back down to £100,000 and get your whole personal allowance back.
This process can also help families avoid losing Child Benefit which is lost if one parent or partner in the household earns more than £50,000.
5. Consider pensions as part of wider estate planning
A defined contribution (personal) pension can pass entirely tax free to any beneficiary as long as the pension holder’s death is before age 75. Even if death occurs after age 75, the beneficiaries do not pay Inheritance Tax, only Income Tax at their marginal rate, and then only if monies are drawn down from the pension. Pensions are now being seen as a way to pass on money to next generations tax efficiently.
6. Inheritance Tax (IHT) Planning – The Residence Nil Rate Band (RNRB)
When it comes to IHT planning, the reliefs often come with caveats and, unless you understand what those are, you are making assumptions. Quite often, those assumptions are wrong.
For instance, those without children cannot benefit from the new Residence Nil Rate Band which can be granted in addition to the IHT allowance of £325,000 per person. For instance, if you leave your home to a niece or nephew there will be no additional allowance. Likewise, it may not be available when a property has been left in trust, because the beneficiary is a trust, not a direct descendant. It could therefore be important for those who have put such arrangements in place to review their Wills.
Furthermore, estates valued at £2 million or more will lose £1 of the RNRB for every £2 of value above £2 million; meaning that if your estate is currently worth more than £2.2 million, there will be no RNRB.
7. Work out how much state pension you will get
It is important to get a State Pension statement (forecast) to check how many qualifying years you have on your National Insurance record. Insufficient National Insurance contributions will mean you do not qualify for the full State Pension; possibly because of career breaks, or not paying the correct NI when you are self-employed.
8. Reduce your tax payment due by 31st July?
The comment that ‘January is tax return month’ is a myth, and only the taxman benefits from you delaying submitting your tax return by 9 months.
If you are on full accounting, or you think your income for 2018/19 is down, we may be able to reduce your tax bill if you complete your tax return BEFORE 31st July. BarTax always advise clients to complete and file their tax returns ASAP after 5th April. The advantages to YOU when you file your tax return SOONER are; HMRC agree your tax figures, you know your future tax bill and can allocate funds and also you sooner close HMRC’s ‘window of investigation’ into your tax affairs.
Start to get your paperwork together NOW, and we can prepare your tax return. You will then know how much tax you need to find for the next THREE payments! You then have time to plan and budget for these payments.
9. Ensure you utilise your ISA allowance
The substantial increase in the ISA allowance to £20,000 was a very welcome step in encouraging individuals to invest for their future. However, as interest rates in the UK remain near record lows, money being held in Cash ISAs is failing to achieve the very basic objective of keeping pace with inflation. The result is real losses for savers. Investing in a stocks and shares ISA can reduce the risk of gains being outstripped by inflation.
Those who are investing their ISA allowance for the long term – in assets offering the scope for attractive levels of income and capital growth – are giving themselves a better chance of maximising the tax-saving opportunities on offer.
9a. Consider an ISA for your children (JISA)
A child up to the age of 18 can hold two types of Junior ISA; a stocks and shares ISA and a cash ISA. The limit for each in 2018/19 is £4,128. However, 16-18 year olds can open an ‘adult’ cash ISA and a JISA in the same year, meaning they can save £24,128 tax free.
16 and 17 year olds can also hold a ‘Help To Buy’ ISA, as this is treated as a cash ISA.
Unlike ‘adult’ ISAs however, where the investor can open and subscribe to new ISAs each tax year, a child can only hold one of each type throughout their childhood (although between 16 and 18 they can hold one of each type, plus an adult cash ISA, which could be a Help to Buy ISA).
10. Personal Savings Allowance
There is a nil rate tax band on interest earned up to £1,000 for basic rate tax payers, and £500 for those on a higher rate. If you are earning interest over this threshold, it may be worth considering your spouse’s tax allowances and transferring savings.
The same could apply to the tax-free dividend allowance of £2,000 allowable to each taxpayer. Dividends received above this amount are taxed at 7.5%, 32.5% or 38.1%, dependent on your tax banding.
11. Marriage Allowance
You may be eligible to transfer £1,190 of your personal tax allowance from your partner/spouse and receive £238 tax reduction. Go to the HMRC website for further details.
Your spouse/partner could work for you, and there is a potential tax saving. HOWEVER, this must be bono fide work, paid at a commercial rate. Please call BarTax if this is something you would like to discuss.
12. Capital Gains Tax (CGT)
For most people, this would relate to assets like property or shares. The capital gains allowance in 2018/19 is £11,700 per person. For higher rate tax payers, it may be that assets should be in joint names (if the other tax payer is in a lower tax banding), or held entirely in their name.
If you are considering disposing of part of your portfolio and your gain is likely to be close to the allowance, it may be worth considering a part disposal, over a number of years. There is no CGT on ISA disposals.
Let a room in your only or main home, and receive up to £7,500 tax free! Further details are available from HMRC.
13. Rent a room relief
14. Tax-free childcare
15. Receive £100 discount off your next invoice
Should you recommend us to a colleague who then goes on to use our services, BarTax will apply a £100 discount to your next invoice.