As the tax year end approaches it seems like a good time to double check you have made the most of all your limits and allowances, so here’s a bit of a tick list for you to just consider……………………….
- Pension (annual allowance £40,000 gross)
- ISA (maximum £20,000)
- Junior ISA (maximum £4,368 per child)
- Gifting for Inheritance Tax (up to £3,000)
- Income Tax (£12,500 @ 0%)
- Capital Gains Tax (£12,000 personal allowance)
- Venture Capital Trust’s (30% tax relief up to a maximum £200,000)
- Enterprise Investment Schemes (maximum £1m)
- Seed Enterprise Investment Schemes (maximum £100,000)
These are only bullet points of tax year end time critical issues to consider, there are plenty of other planning ideas/solutions to dealing with efficient tax planning over the longer term, which we are always happy to assist and advise you upon.
Pension – Essentially you can contribute as much as you like into a pension but you will only be entitled to receive tax relief on up to £40,000 (known as the annual allowance) or 100% of your earned income, whichever the lesser.
You are able to carry forward unused allowances from the past 3 tax years provided you were a member of a pension scheme during that time.
Pitfalls – People who have already started to drawdown money from their pension unfortunately get a reduced annual allowance of just £4,000. Also those fortunate enough to be earning in excess of £150,000pa have their annual allowance reduced by £1 for every £2 over the £150,000, therefore someone earning in excess of £210,000pa would end up with an annual allowance of just £10,000.
Also, be mindful of the ‘Lifetime Allowance’ which is currently £1,055,000 which basically means you could face a tax charge of 55% in the future on the excess over this amount if all your pension pots when add together breach this limit. It does go up each year in line with CPI.
Planning Opportunities – If you have children under the age of 18 or a spouse who does not work, or does work but earns under £12,500 (income tax personal allowance), you can still contribute to a pension in their name and receive 20% basic rate tax relief on the contribution. It’s called the di minimis level and it is £3,600 gross or £2,880 net. So you pay in £2,880 and it automatically becomes £3,600 by the time HMRC applies the tax relief, this is the equivalent of a 25% return.
ISA/Junior ISA – HMRC allows every UK resident (over the age of 18) to invest up to £20,000 per tax year into any ISA qualifying investment and all income and gains are free of tax. You can also contribute up to £4,368 into a junior ISA for a child or grandchild. Investments range from cash only to funds, investment trusts and even peer to peer lending under what is called the Innovative Finance ISA (IFISA). Please bear in mind IFISA is not available for junior ISA’s. The important thing is to use your allowance each tax year whenever possible as next tax year you get another £20,000 allowance and there are people in the UK that have made use of this allowance every year and are now known as ISA millionaires.
Pitfalls – ISA’s might be free of income tax and capital gains tax which is all good and well whilst you are alive, but when you pass away the ISA wrapper dies with you and the total value of all your ISA’s are included in your estate when it comes to calculating inheritance tax due on your estate. There is one exception to this where the ISA’s are invested in AIM listed stocks, which basically means smaller companies and obviously comes with much higher risk to capital and increased volatility.
Planning Opportunities – Maximise the amount you can get into ISA’s and junior ISA’s, even if you are uncertain about the markets at the moment, as you can always simply hold it in cash for now until you are ready to invest, the main thing is not to lose this tax years ISA allowances, as you can not go back in time.
Gifting for Inheritance Tax – You can gift away up to £3,000 per tax year and even carry back one year if you did not make use of this last tax year, therefore theoretically you could gift up to £6,000 without the need to survive 7 years after making the gift as this is your personal annual allowance and is considered immediately out of your estate. There are also other small gift exemptions like £5,000 for the wedding of your child or £2,500 for a grandchild or great grandchild and £1,000 to anyone else. I know these are reasonably small sums, but again they soon compound to make a reasonable difference if you make use of these allowances each and every year.
Pitfalls – Every little helps but I hear you saying these amounts are simply too small to be bothered about and how do I prove I made the gift anyway – that’s easy, there’s a box for it on your annual tax return that tells HMRC you have made use of this particular allowance.
Planning Opportunities – I’m struggling to put a positive spin on this one, but I guess it just comes back to ‘every little helps’ and those kids and grandkids will certainly love grandma! Remember, you can’t take it with you, despite what the Egyptians thought.
Income Tax – Unless you are a non-domicile claiming the remittance basis of tax then everyone in the UK over the age of 18 get’s a personal income tax allowance where any earnings up to £12,500 per tax year are taxed at 0%, however not everyone actually fully utilises this important allowance. There is also a £2,000 allowance for dividends.
Pitfalls – It’s not just earned income that uses up your personal income tax allowance, it’s also any income you receive from bank interest or dividend income from shares you may own. Remember once you exceed £12,500 then you pay 20% tax on anything up to £50,000 then from £50,000 to £150,001 you pay 40% then 45% thereafter.
Planning Opportunities – I encounter so many couples where one of them is the main breadwinner with all the earnings and taxable income and in most cases they have never even given it a thought that by putting investments or anything else that is likely to generate taxable income in the other spouses name they can better utilise both income tax allowances.
Capital Gains Tax – Just like the income tax personal allowance, everyone who is resident in the UK is entitled to a £12,000 capital gains tax (CGT) annual allowance whereby any capital gains you make in a tax year are taxed at 0% up to a gain of £12,000 (£6,000 for trusts). Any gains made in a tax year by a basic rate taxpayer are taxed at 10% and 20% for a higher rate taxpayer. Worth noting property is still taxed at 28% if it is not your principle place of residence.
Pitfalls – Never let the tax tail wag the investment dog. By this I mean don’t simply sell a good investment to make use of your CGT allowance, but equally try to manage your CGT allowance to make full use where possible both sides of the old and new tax year.
Planning Opportunities – There is no CGT between spouses (even more reason to be married and stay married!), so you can transfer an asset to your spouse and he/she can sell the asset in his/her name and you effectively get two CGT allowances.
Venture Capital Trusts – These offer 30% flat rate of income tax relief, so for example if you invested £50,000 into a VCT this tax year you could reduce your income tax liability for the current tax year by £15,000. Of course, you have to have a tax bill of £15,000 or higher to start with, as you can not claim tax relief that is higher than the amount you actually owe. But theoretically you could invest up to a maximum of £200,000 per tax year and get up to £60,000 in tax relief. Worth noting though, that you must hold them for a minimum of 5 tax years in order to retain that tax relief.
Pitfalls – These are considered higher risk investments and are not for the feint hearted, however there are some VCT’s that are less well established than others so it could be argued that they pose a higher degree of risk to the underlying investment than others which have a well established track record where some of those underlying companies are £2bn companies and arguably very large small companies. It’s important to remember that the government is dangling the carrot of 30% tax relief to encourage investors to take risk and invest in UK smaller companies where there will inherently be more risk than investing in a FTSE100 larger company.
Planning Opportunities – I would say that VCT’s should only be considered by those at the higher end of the risk profile and also only be considered once you have maximised pension contributions or where you are at or over your pension lifetime allowance. For those over their lifetime allowance for pensions this seems to be where everyone is flocking as it gives a flat rate of 30% tax relief (not as good as pension) but the next most obvious choice.
Enterprise Investment Schemes – If you thought VCT’s sounded a bit risky then EIS can best be described as a VCT on steroids, so certainly not for those concerned with risk to capital. They do however offer you 30% tax relief like a VCT and you only have to hold them for 3 years in order to retain that tax relief.
Pitfalls – Under an EIS you are directly investing into smaller companies and it can take up to 18 months before becoming fully invested as each individual investment generates a share certificate and other associated paperwork and although the rules say you only have to hold it for 3 years to retain your tax relief in reality it can take longer than that by the time you become invested and then there is the time to find a buyer as these are unquoted companies and some of them will undoubtedly fail.
Planning Opportunities – Unlike VCT’s, an EIS offers loss relief which enables you to offset any losses made against your income tax bill. Also, for those with sufficient wealth these do allow you to invest up to £1m per tax year or even £2m where at least £1m is invested in what are known as ‘knowledge intensive companies’.
Seed Enterprise Investment Trusts – Maximum investment of £100,000 per tax year. I would describe these as a risk profile 11 out of 10 as they are quite simply investments into start up business’s where typically 8/9 out of 10 will probably fail, but that one success could be a good one. Hence HMRC offers investors 50% tax relief when investing into an SEIS.
Pitfalls – Tax relief is nice, but there’s a reason HMRC are trying to sweeten the deal here, it all about RISK!
Planning Opportunities – Unless you are that way inclined that you like a gamble, and have plenty of cash to do it with, then I would advise you to stay away from this type of investment (or should I call it gamble) as it is akin with that old saying about buying a football club if you want to get poor quickly