Pre 5 April Tax Planning

As the end of the tax year approaches now is the time to review your tax affairs to ensure that you have taken advantage of the various tax allowances and reliefs available to you.

Personal Pension Contributions

If your taxable earned income exceeds £41,865 for the year ended 5 April 2015 then you will be liable to tax at the higher rate. You can reduce your tax liabilities and save towards your future retirement by making personal pension contributions. Your pension provider can claim basic rate tax relief on the contributions you pay so if you made pension contributions of £1,000 then tax relief of £200 can be claimed making the total contribution to your pension plan £1,200. In addition if you are a higher rate tax payer you can claim an additional 20% tax relief of £240 on the total contribution.

The result is a gross contribution of £1,200 into your pension which has only cost you £760. You can make pension contributions totalling £40,000 during this current tax year, including personal and employer contributions, though this figure could be higher if you have not made maximum payments in previous tax years.

Even if you do not have any earned income you can still make pension savings of up to £2,880 per year. Basic rate tax relief can be claimed which will result in a gross contribution of £3,600 being made to your pension savings.

Gift Aid

Again if you are a higher rate taxpayer you can help a worthy cause and save tax. For every £100 you gift, the charity can claim an additional £20 from the government, making your total gift £120. You can then claim higher rate tax relief on this gift of £24 so a gift of £120 has only cost you £76.

Transferring Assets

Spouses should review their assets to ensure that they are owned in the most tax efficient way. Gifts between married couples or civil partners are exempt from capital gains tax, therefore if one spouse is either a non taxpayer or a basic rate taxpayer it is possible to transfer income producing assets from the higher taxpaying spouse to make the best use of the tax allowances available. In addition, if the higher earning spouse is subject to the child benefit claw back charge then placing income in the hands of a lower earning spouse can go someway towards ensuring as much as possible of the child benefit is retained.

Child Benefit Charge

Since January 2013 there has been a charge on families who receive child benefit where one of the partners has income in excess of £50,000 per year. By reducing the relevant income used to calculate the claw back of child benefit you can retain more of your child benefit, and both pension contributions and gift aid payments will help with this. For example if you have gross income of £53,000 then you would be liable to repay some of the child benefit received. However if you have made personal pension contributions of £2,400 during the year then these are grossed up to £3,000 and can be offset against the income of £53,000. This would mean that the income figure used to calculate the child benefit charge is now reduced to £50,000 and therefore it would not be necessary to repay any child benefit received. Any gift aid payments made can be offset in the same way.

Tax Planning

• Try to use the ISA allowance available to you. This has increased to £15,000 per adult and the income from this is tax free. Parents can also contribute up to £4,000 to a Junior ISA for children under 18.
• Everyone has a capital gains tax exemption of £11,000 for 2014/15. This allows you to sell assets and make gains up to this amount without having to pay any capital gains tax. If you have already made gains up to this limit then consider selling any investments which are standing at a loss as this can be set against your capital gain. Losses can also be carried forward and used to reduce any future capital gains tax.
• If you would like to make gifts to someone other than your spouse then you can give away up to £3,000 each year without any inheritance tax consequences. This does not include any gift aid payments you make. If you have not made any gifts in the last tax year then you can make gifts up to a value of £6,000 before the end of the tax year.

Looking Ahead

Looking forward to the new tax year, new rules have been introduced with effect from 6 April 2015 which will allow a limited transfer of the personal allowances between spouses. This is limited to where both spouses are liable to tax at the basic rate or where one spouse is a non taxpayer. The amount of the allowance which can be transferred is £1,060 which means a tax saving of £212 over the year. Allowances cannot be transferred where one spouse is liable at the higher rates.

You will have until the end of the tax year to decide if this would benefit you.

A new tax rate of 0% will be introduced on 6 April 2015 for savers with little other income. If your total income, including bank or building society interest, will be below £15,600 for the 2015/16 tax year then you can register to receive your interest tax free.

There are plenty of ways you can reduce your tax liabilities and make your money work for you rather than the taxman. All of these suggestions make the best use of the allowances and reliefs available and is not aggressive or contentious tax planning.

If you would like to discuss anything contained in this article in more detail then please contact a member of the tax team on 0845 880 5678 or email action@wrightvigar.co.uk