As you know from our previous mailings at this time of year, we want to make sure that you are aware and are using all of the tax efficient allowances available to you. The end of the tax year is a Saturday (5th April) and so the 4th April is going to be the last day that you can take advantage of these opportunities.
Here are some planning ideas, together with some worked examples for you to consider.
Individual Savings Accounts (ISA)
First of all, just a reminder about ISA’s. The overall personal limit for an ISA for the current tax year is £11,520 and this will increase to £11,880 from the 6th April. There is no income tax or capital gains tax payable on ISA proceeds, making them the most tax efficient savings vehicle in the medium to long term. You cannot carry over your ISA allowance and once the year has ended, it is lost.
For these reasons, if you can fill up your ISA allowance then you should. Building up a substantial ISA pot means it can be used in the future to provide you with a tax free income. The chart on the overleaf assumes an annual contribution of £11,520, with a 7% per annum growth rate. This is of course just an example. We have shown from year 5 onwards.
If you don’t have readily available cash then we can look to move funds from your other investments into the ISA environment.
For those of you with children (and grandchildren) who do not have an existing Child Trust Fund (you aren’t allowed a Junior ISA if you have a Child Trust Fund) a Junior ISA is a tax efficient way to build up funds for the future. They work in exactly the same way as your own ISA, however the maximum investment is £3,720. This will increase to £3,840 on 6th April.
If your child already has a Child Trust Fund, then you should look to fully fund this before the tax year end. The allowance is exactly the same as the Junior ISA.
The main points regarding pensions remain the same. You will receive tax relief on contributions at your highest rate of tax and the fund grows virtually tax free. At retirement you can take 25% of the fund as a tax free lump sum.
One major change is a reduction in the amount you can contribute to the pension each year. Until 5th April you can contribute £50,000 and this is reducing to £40,000 from 6th April. You can also take advantage of unused contributions from previous years, dating back 3 tax years to really give your retirement planning a boost.
The maximum you might be able to contribute (and this depends on a variety of factors) is £200,000.
Here is an example.
|Less Pension Input||£0||£0||£0||£0|
|Cumulative Unused Allowance||£100,000||£150,000||£200,000|
One important planning point is the use of pension contributions to retain your Personal Allowance–this is the first £9,440 of income which is not taxable. The current rules mean that anyone with income over £100,000 will lose £1 off their personal allowance for every £2 of earnings over £100,000. So if you earn over £118,880 you lose your personal allowance completely.
The example shows how a specific pension contribution can avoid this.
|John has earnings of £118,880 and makes no pension contribution|
|Full Personal Allowance||£9,440|
|Personal Allowance remaining||£0|
|Amount on which Tax is calculated||£118,880|
|Total Income Tax||£41,150|
|John has earnings of £118,880 and makes a £18,880 gross pension contribution|
|Less Personal Pension Contribution||(£18,880)|
|Adjusted Net Income||£100,000|
|Personal Allowance remaining||£9,440|
|Total Income Tax||£33,598|
|Tax Saving between Scenario 1 and 2||£7,552|
|Plus Basic Rate Relief on Pension Payment||£3,776|
|Effective Tax Relief on £18,880 Contribution||60%|
In addition, if you have a spouse who does not work, or children under 18, you can invest up to £3,600 per annum into a pension for each of them and this will cost you £2,880.
If you would like to make a contribution to your pension before the end of the tax year, please let me know as soon as possible so that we can confirm the details to you.
Lifetime Allowance Protection
We have previously sent out a note about the Lifetime Allowance, but as a reminder, the final date to apply for protection is the 5th April 2014. After that date your Lifetime Allowance will be reduced to £1.25 million from the current level of £1.5 million, unless you have protection in place.
If you have already got protection in place, you will need to be careful that you are not enrolled into a workplace pension scheme under the new Auto Enrolment rules as this could negate your protection. I will be sending out a separate note about this.
Capital Gains Tax
Every individual is entitled to a Capital Gains Tax (CGT) annual exemption and this is currently £10,900. It is not possible to carry forward this relief and so you may look to crystallise gains up to this amount before the end of the tax year.
Spouses have two annual exemptions between them and can take advantage of the rules allowing assets to be gifted with no CGT implication until the asset is subsequently disposed of.
For example, if you pay the higher rates of tax and hold shares which are providing a taxable income and your spouse is either a non or a basic rate tax payer, you could look to transfer the shares into their name. There would be no immediate CGT implications and your taxable income is reduced.
Capital losses can also be used to offset gains and if appropriate for you, this is something we can look at before the end of the tax year.
Inheritance Tax is something that is likely to affect many of us but there are a number of options you can consider to help to reduce the impact on your Estate.
Each person has an allowance of £325,000 before any tax is due and for a married couple that is £650,000. In many cases, when you take a property into account, this doesn’t go that far.
Some options to reduce the value of the Estate are as follows:
- You can each make gifts during a tax year (up to £3,000 in total) and these will be immediately classed as being outside of your estate. Larger gifts over and above this amount will be deemed as a Potentially Exempt Transfer and the 7 year clock will start ticking,
- You can make unlimited gifts out of income provided that it doesn’t affect your standard of living and subject to various criteria; eg the payments must be regular and made from net income not capital,
- Purchase of AIM shares which qualify for Business Property Relief. These need to be held for 2 years and then will be classed as outside of the Estate. They must also be held at death,
- The use of Trusts.
The use of an insurance policy to pay the Tax due is also a simple and effective method of preserving the value of your Estate.
There are plenty of effective solutions to inheritance tax and we have a guide available outlining these options. We will be happy to send this to you or discuss individual requirements.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS)
As well as the simpler tax planning ideas, there are other higher risk and more complex areas, such as Venture Capital Trusts and Enterprise Investment Schemes, which are tax year sensitive. These are traditionally higher risk investments but can offer up to 30% tax relief. The table below shows the main tax advantages.
|Venture Capital Trusts (VCTs)||Enterprise Investment Schemes (EIS)|
|Income Tax Relief||30% provided held for 5 years||30% provided held for 3 years|
|CGT Exemption||Gains exempt from CGT and there is no minimum period which shares must be held, however if held for less than 5 years, you would lose your tax relief.||Gains exempt from CGT provided they have been held for 3 years.|
|Dividend Treatment||Dividends received from VCT investments of up to £200,000 per tax year are exempt from any additional income tax.||Taxed in the usual way|
The earlier end of year tax year planning starts the better so please do get in touch if you have any questions or if you would like to take advantage of any of these opportunities.
We look forward to hearing from you.