Not many of us enjoy the prospect of paying or even thinking about tax but it always seems to be there in some form and is commonly quoted as one of life’s certainties. However, there are various valuable tax allowances and reliefs available each year.
Making the right decisions in order to navigate your tax position moving forward could make the process of paying tax less onerous.
> The most relevant day-to-day tax for most of us is income tax. The top rate of income tax is 45% (for earnings in excess of £150,000 p.a), basic rate is 20% and higher rate tax is 40%.
> You have a personal allowance of £12,500 which begins to be phased out on income above £100,000 (by £1 for every £2 resulting in a complete loss of personal allowance for income above £125,000).
Capital gains tax (CGT)
> CGT rates are currently favorable compared to income, at 10% or 20% (or 18% or 28% where property is involved).
> You have an annual exemption, currently £12,000 for the tax year 2019/20.
> Claiming previous losses is also an option. If you have sold an asset and realised a loss, you can claim the loss on your tax return. If you do not claim the loss within four years, the loss is lost!
Inheritance tax (IHT)
> This tax is likely deemed to be the most disliked as it can feel as though you are paying tax twice.
> However, gifts of up to £3,000 in total can be made each year without any IHT implications. If the £3,000 exemption was unused in the previous tax year, this can also be carried forward so the maximum available exemption can be up to £6,000.
> Small gifts of up to £250 per recipient and gifts in consideration of marriage of up to £5,000 by a parent are also available options.
> Any surplus income is not subject to IHT, so being able to show a pattern of gifts can remove this from a person’s estate immediately. To be accepted, you must be able to show you have maintained your standard of living after the gifts.
> Ultimately, when you pass away, you have a nil rate band on your estate, currently £325,000, and potentially a *residential nil rate band on your main residence, currently £150,000 increasing to £175,000 from 6th April 2020. On estates valued above the nil rate bands, there is a potential tax liability of 40% on the excess.*The residential nil rate band is tapered on estates valued above £2m.
Investments and dividends
> Tax-efficient investments could also be considered as part of any tax planning exercise and there are many options: Individual Saving Accounts (ISAs), Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS).
> Investments that qualify for Business Relief for example, offer different solutions so financial advice from an appropriately qualified adviser should always be sought.
> Each individual also has a dividend allowance of £2,000 for the current tax year 2019/20. If you own your own company you could consider declaring a dividend before the end of the tax year to utilise your dividend allowance.
> It is also worth considering transferring shares to a spouse or civil partner if they have not used their own dividend allowance to double the tax relief.
> Although the government has made changes in recent years, pensions still remain very tax efficient and as there are limits to what can be contributed, specialist advice is needed.
> You can make use of your annual pension allowance, currently £40,000 or 100% of taxable earnings if less, which can give valuable tax relief.
> Unused pension allowances from previous tax years could potentially be carried forward for three years, but then falls away.
In summary, tax is there and not going away. However, there are allowances available and developing a strategy to make use of such allowances and opportunities can prove to be a worthwhile exercise.