As the end of the tax year approaches, now is the perfect time to ensure you have your financial affairs in order and to double-check that you’ve taken advantage of all the tax-efficient allowances available to you.
Here’s a reminder of the main tax planning opportunities:
- Pensions – current Annual Allowance of £40,000.
- Individual Savings Allowances (ISAs) – maximum contribution of £20,000 each.
- Junior Individual Savings Allowances (JISAs) – maximum contribution of £4,128 per child.
- Gifting for Inheritance Tax (IHT) purposes – up to £3,000 a year.
- Using Capital Gains Tax (CGT) allowances – £11,300 annual exemption per person.
- Enterprise Investment Schemes (EISs)– maximum investment of £1,000,000.
- Venture Capital Trusts (VCTs) – maximum investment of £200,000.
- Seed Investment Schemes (SEISs) – maximum investment of £100,000.
You can contribute as much as you like into your pension, but there is a limit on the amount of tax relief you will receive each year.
This annual allowance is currently £40,000, or 100% of your earnings, whichever is lower. You can, however, carry forward unused allowances from the past three years, provided you were a pension scheme member during those years. There are a couple of exceptions to this rule. One relates to people with defined contribution pensions who start to draw money from them, in which case the allowance drops to £4,000 in some situations; the other tapers the allowance if your income plus pension contributions exceed £150,000 a year.
This reduction in the annual allowance is applicable for people who have ‘adjusted income’ in excess of £150,000 a year. The annual allowance is reduced by £1 for every £2 over £150,000, with the maximum reduction totalling £30,000. This reduction does not apply to individuals with a ‘threshold income’ of no more than £110,000. So, for example anyone with an income of £210,000 or more will have their annual allowance reduced to just £10,000.
A lifetime allowance also places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1 million, increasing by £30,000 to £1,030,000 from April 6 2018.
If you have children under 18, a spouse who does not work, or who may not be earning enough to pay Income Tax, you can invest into a pension for each of them. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, would amount to £3,600 a year.
Your Individual Savings Account (ISA) allowance
The ISA allowance is now a generous £20,000 for the 2017-18 and 2018-19 tax years. You can put all of the £20,000 into a Cash ISA, or invest the whole amount into a Stocks and Shares ISA. You can also mix and match, putting some into Cash and some into Stocks and Shares if you wish. However, the combined amount can’t exceed your annual ISA allowance.
With pension contributions subject to annual and lifetime limits, ISAs represent an excellent way of topping up retirement income. There is no income tax or CGT payable on ISA proceeds. You cannot carry over your ISA allowance once the tax year has ended.
In certain circumstances, investors can use existing holdings to open, or top up, their ISAs, this arrangement is known as a Bed & ISA. This is a way of transferring assets held outside an ISA into an ISA so that future investment income and growth are sheltered from tax. The investments are sold, cash is transferred into the ISA and the investments are repurchased. Charges apply and you could end up with a CGT liability if the gain you make on selling the asset together with any other taxable gains you make within the tax year exceeds the annual CGT allowance.
Other ISA options available include the Help-to-Buy ISA and the Lifetime ISA.
Junior ISA Contributions
Junior ISAs are a tax-efficient way to build up savings for your children (and grandchildren) and can be opened for any child under 18 living in the UK. The money can be held in Cash and/or invested in Stocks and Shares.
They work in exactly the same way as your own ISA, however, the maximum investment is £4,128 per child. This allowance will be uprated in line with CPI to £4,260 from 6 April 2018.
If your child already has a Child Trust Fund, then you should look to fully fund this. The allowance is exactly the same as the JISA but corresponds to your child’s birthday year rather than the tax year.
Gifting for Inheritance Tax (IHT) purposes
You can give away gifts worth up to £3,000 in each tax year. These gifts will be exempt from IHT on your death. You can carry forward any unused part of the £3,000 exemption to the following year but if you don’t use it in that year, the exemption will expire.
Certain gifts don’t use up this annual exemption, however, there is still no IHT due on them e.g. wedding gifts of up to £5,000 for a child, £2,500 for a grandchild (or great grandchild) and £1,000 to anyone else. Individual gifts worth up to £250 are also IHT free.
These are relatively small sums but you should use these up where possible to gradually reduce your overall estate.
Using your Capital Gains Tax (CGT) allowance
Every individual is entitled to a CGT annual exemption which is currently £11,300 (£5,650 for trusts) and will increase to £11,700 (£5,850 for trusts) from 6 April 2018. You can’t carry forward this relief and so you may look to crystallise gains up to this amount before the end of the tax year. Capital losses can also be used to offset gains.
Above the CGT allowance, basic rate tax-payers selling investments would pay CGT at 10%, with higher rate tax payers paying at 20%. The CGT allowance for individuals increases to £11,700 from April 2018.
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.
Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEISs)
In addition to simpler tax planning ideas, there are other more complex areas, such as VCTs and EISs and SEISs, which are tax year end sensitive.
These are traditionally higher risk investments but can offer up to 50% tax relief and provide portfolio diversification.
EISs – maximum investment of £1,000,000 with 30% tax relief provided the investment is held for three years, gains are also exempt from CGT provided they have been held for three years.
VCTs – maximum investment of £200,000 with 30% tax relief provided the investment is held for five years, gains exempt from CGT, conditions apply.
SEISs – maximum investment of £100,000 with 50% tax relief, CGT exemption where SEIS shares are sold more than three years after they are issued, further CGT exemption of 50% where an individual makes a capital gain and reinvests the gain in qualifying SEIS.
From April 2018, investors will be able to double their investment in EISs to £2 million, provided these are ‘knowledge intensive’ businesses.
From 6 April 2018 the Dividend Allowance will be reduced
For the current tax year, investors can earn up to £5,000 in dividend income tax-free, but this figure is set to drop to £2,000 from 6 April 2018. The reduction will affect individuals with non-ISA dividend income in excess of £2,000. The government estimate two thirds of people with dividend income will not be affected, but of the 2.27 million individuals who are, they can expect an average loss of around £315 in tax year 2018–19.
Since the new rules surrounding taxation of dividends came into effect in April 2016, dividends in excess of the allowance are subject to new tax rates – basic rate 7.5%, higher rate 32.5% and 38.1% for additional rate. The whole concept was introduced in an attempt to incentivise more people to reinvest their dividend income and to deter tax-minimising strategies.
Among those hardest hit will be small business owners. The reform in 2016 and imminent further reduction in the allowance have placed a significant impact on these owners who are basic-rate taxpayers and take a large portion of their annual remuneration as dividends.
With the tax year-end imminent, please get in touch with us as soon as possible if you have any questions or want to discuss any aspect of your end of year tax planning.
We look forward to hearing from you.