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
- Pension (annual allowance £40,000 gross)
- ISA (maximum £20,000)
- Junior ISA (maximum £4,368 per child)
- Gifting for Inheritance Tax (up to
- Income Tax (£12,500 @ 0%)
- Capital Gains Tax (£12,000 personal
- Venture Capital Trust’s (30% tax relief
up to a maximum £200,000)
- Enterprise Investment Schemes (maximum
- Seed Enterprise Investment Schemes
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
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 – 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
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.
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.
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.
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
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.
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.
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
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’.
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