This summary outlines some of what we believe to be the most important personal tax planning tips for you to consider before the tax year end on 5 April 2014.
Income Levels and Rates of Tax
For 2013/14, income in excess of £150,000 is taxed at 45%. As personal allowances are reduced to nil for
income between £100,001 and £118,880, income between those amounts is taxed at a staggering 60%. If your income is close to these limits, tax savings can be achieved by reducing income to below these £100,000 or £150,000 thresholds. For example:
- Employment bonuses could be deferred until after 5 April.
- The level of ‘draw-down’ income from self invested personal pension (SIPP) arrangements can be adjusted.
- If you can influence when dividends are paid, the payment can be brought forward or deferred to ensure that it falls into the tax year most beneficial to the shareholder.
- Making charitable donations or pension contributions (see below).
- Claiming all tax allowable expenses.
- Transferring income yielding assets to your spouse or civil partner.
These techniques can also work where income is close to the £50,000 threshold that applies to the claw-back of child benefit.
If, on the other hand, you need to realise income in a year to make full use of personal allowances etc, investment bonds could be surrendered, or bank accounts closed to trigger interest receipts (but watch out for any penalties or tax charges that might apply).
Consider whether to make charitable donations where your income just exceeds £100,000. Such donations will obtain tax relief at an effective rate of 60%. Donations made after 5 April 2014 can be carried back to 2013/14 if the donation is made before 31 January 2015 and before you submit your tax return.
A gift of investments rather than cash may mean there are capital gains tax savings as well.
To save National Insurance (NI), think about paying dividends rather than bonuses. Also consider the timing of these payments or sacrificing cash payments to receive benefits in kind or pension contributions in lieu of salary.
Subject to new anti-avoidance rules, think about whether it is appropriate to incorporate your business, introduce a corporate partner or service company or change your accounting date.
Review the cost of your company car; consider replacing it with one with lower emissions or for a privately owned car and claim mileage instead.
Consider investing in new plant and machinery to take advantage of the increase in the Annual Investment Allowance to £250,000 up to 31 March 2014.
If you are running a payroll, ensure you claim the £2,000 employer’s NI reduction which applies from April 2014.
Tax Efficient Investments
Where appropriate, make use of the ISA allowance which is currently £11,520 per individual. Junior ISAs are available for children under 18 (up to £3,720), where they do not hold a child trust fund.
30% income tax relief is available, up to a maximum of £200,000, when you subscribe for shares in a Venture Capital Trust (VCT). In addition, dividends and capital gains from the VCT are tax free. If you already hold VCTs, some providers have favourable buy-back arrangements.
Consider whether to invest in Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) investments – consider risk versus tax reliefs. The income tax relief is 30% and 50% respectively of the investment (restricted to the overall tax liability) and there are CGT and inheritance tax (IHT) benefits as well.
In general, your home is exempt from capital gains tax. If you have a second property which you also live in, it may be possible to nominate which is your main residence to maximise the tax relief available.
Think about the timing of the sale or encashment of single premium investment bonds to prevent gains being taxed at higher rates, if there is an opportunity to do this in a year when your income and marginal tax rate is lower. Alternatively, maximise partial withdrawals (up to 5% pa) and avoid encashment until the marginal tax rate reduces.
Consider assigning segments of bonds to a lower rate taxpaying family member in advance of a sale to reduce the overall tax liability – but where bonds are held in trust, ensure that the trust deed allows for the transfer and that there are no IHT implications.
Married Couples or Civil Partners
The transfer of income-producing assets between spouses or civil partners may help where one is liable at the higher or additional rates of tax or if their income would have caused the personal allowance to be restricted. For this to be effective, any gift must be made absolutely and unconditionally.
If you are reluctant to transfer all cash deposits to a lower taxed spouse or civil partner, consider transferring them into joint names, so that a degree of control is retained.
A higher income spouse or civil partner in business could pay the other a salary or make a contribution to their personal pension plan. The remuneration must be reasonable in relation to the work undertaken and it must actually be paid to the spouse or civil partner via a formal payroll.
Capital Gains Tax Planning
Consider crystallising capital gains prior to 6 April 2014 to take advantage of CGT allowance (currently £10,900 per individual) and losses brought forward.
If capital gains already exceed £10,900, consider selling investments with unrealised losses to set against the excess gains.
Sales of investments or other assets with substantial chargeable gains might be deferred until after 5 April (subject to commercial considerations) to defer the payment of the tax liability by twelve months.
Consider transferring investments between spouses or civil partners prior to sale to take advantage of losses/ allowances. Note that there are complex anti-avoidance rules regarding ‘artificial’ losses.
Remember that losses on EIS investments may be set against income rather than capital gains. It might be possible to bring forward a loss (eg by making a negligible value claim) to reduce income below the additional rate threshold.
Future Investment Strategy
Is there scope to invest for growth rather than income, to take account of the (currently) favourable tax free capital gains tax exemption and the 18% (or 28%) tax rate on capital gains? Consider nil or low yield growth investments if these fit your risk profile.
Child Benefit Charge
Taxpayers who receive child benefit payments may be subject to the high income child benefit charge if their adjusted net income is more than £50,000.
Couples may be able to arrange their affairs to ensure that neither of them has income over £50,000, perhaps by making pension contributions, salary sacrifice or charity donations. Alternatively, they might opt out of the child benefit to avoid the complication of the tax charge.
Remember to make use of the annual IHT allowance (£3,000 per individual). You can also use any unused allowance from the previous year. Also, it is possible to make regular gifts to family members using the ‘regular payments from income’ exemption. You will need careful documentation to prove that the gifts are made from income and not capital.
If you are intending to make potentially exempt gifts to family members, consider whether these should be made sooner rather than later, in case of changes in legislation.
Ensure you have an up to date Will.
The maximum annual pension allowance is falling to £40,000 in 2014/15 from £50,000. However, there are carry forward rules that may allow for additional payments.
Don’t forget pension contributions for non earning spouses (or civil partners), or children – maximum gross payment of £3,600 (£2,880 after deducting tax relief).
With the pension lifetime allowance reducing again from £1.5 million to £1.25 million, you may need to consider whether to elect for ‘Fixed Protection 2014’ or ‘Individual Protection’. The deadline for making the Fixed Protection 2014 election is 5 April 2014.