In the lead up to the end of a tax year on 5 April, many people review their financial situation and whether they should, and could, make use of their various annual allowances. Here we outline some planning ideas and reminders.
Have you maximised your pension contributions for this tax year using your annual allowance and any available carry forward allowance, to benefit from income tax relief at your highest marginal rate?
The personal allowance is reduced by £1 for every £2 that an individual’s income exceeds £100,000 and there’s no personal allowance at all where an individual’s income is over £123,700. The effective rate of income tax where an individual’s income falls between £100,000 and £123,700 is 60%, so by making a pension contribution you could benefit from tax relief at 60% on income within this band.
Child benefit reduces by 1% for every £100 that the higher earner in the household’s income exceeds £50,000, so one way of maintaining child benefit may be through the use of personal pension contributions.
The 2018/19 dividend tax free-allowance is £2,000. Basic-rate taxpayers can currently benefit from a personal savings allowance of £1,000 and higher-rate taxpayers an allowance of £500. Married couples might want to transfer assets between themselves and both spouses can use their respective dividend tax-free allowance and personal savings allowance, especially if one spouse pays tax at a lower rate than the other.
The ISA allowance for 2018/19 is £20,000. ISAs attract both income tax and capital gains tax benefits. If an individual doesn’t use their ISA allowance within the tax year, it can’t be carried forward to future years.
Alternative investments such as Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs) to benefit from income tax relief at 30%, should also be considered.
Capital Gains Tax (CGT)
The CGT annual exemption is £11,700 in this current tax year (2018/19). Any unused exemption can’t be carried forward to future years. Therefore you may wish to consider using your annual CGT exemption this current year to:
> crystallise some gains by switching funds or withdrawing capital from your investment
> fund an ISA contribution
> fund a pension contribution.
Remember: capital losses realised in the current year are offset against capital gains realised in the year, before deducting the annual exemption. If you have an unused capital loss, this can be carried forward indefiniely against gains of future years.
Spouses may want to transfer assets between themselves to make full use of both their annual CGT exemptions.
If a higher-rate or additional-rate taxpayer has crystallised gains in excess of the annual CGT exemption, they might want to consider making a personal contribution to a registered pension scheme operating tax relief at source, as this could result in the capital gains being taxed at 10% rather than 20%, as the pension contribution will lead to the client’s basic-rate band being extended.
Make sure you consider using the available IHT exemptions such as:
> £250 small gifts exemption
> annual £3,000 exemption
> gifts in consideration of marriage
> normal expenditure out of income exemption.
Speak to your financial adviser about tax planning especially making use of allowances for the end of a tax year, and for IHT purposes, trust planning to start the seven year clock, or look at other options such as Business Relief, which reduces the timeframe to two years for exemption from this tax, hence making provision for future generations.
Please note: the ideas covered in this article may not be suitable for your individual circumstances and we always recommend you take advice from an independent financial adviser.