If you haven’t started thinking about it yet, now is definitely the time to get your year-end tax planning affairs in order. Here, Aloysia Daros, senior tax manager, and Thomas Skinner, senior consultant, at Smith & Williamson consider a few key areas to focus on ahead of the end of the tax year on 5 April.
This is the amount of income each individual can receive that you do not have to pay tax on. In 2015/16 this is £10,600. Unused personal allowances cannot be carried forward or transferred, so this is a case of “use it or lose it”.
The allowance is lost at a rate of £1 for every £2 of income where the adjusted net income is over £100,000, until the allowance is totally extinguished. This creates an effective tax rate of 60% for income levels between £100,000 and £121,200.
Transfer income-producing assets to your spouse
Transferring assets such as property or quoted investments to a spouse is accepted by HMRC provided all of the economic benefit from the property is genuinely given away. It’s not always necessary to give away total control; for example, property can be owned in the proportion 99:1 and the income shared 50:50. It’s worth noting that in the case of private company shares it’s the entire economic value of the share that must pass, and not simply the right to a dividend, to ensure it’s taxed on the other spouse.
Utilise your annual pension allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of the annual allowance or your net relevant earnings.
Transitional rules introduced in the Budget on 8 July 2015, mean that there’s an annual allowance of £80,000 for the current tax year, although only £40,000 of this can be used between 9 July 2015 and 5 April 2016. It may also be possible to take advantage of unused annual allowance from the three previous tax years.
This is a complex area as pensions are subject to a lifetime cap which is being reduced from £1.25m to £1m from 6 April 2016. Those with significant pension pots will need to consider the implications of this on their pension planning and specialist advice ought to be sought before making any contributions.
Changes to the taxation of dividends
From 6 April 2016, the way in which dividends are taxed will change. Rather than receiving a 10% tax credit on all dividends, you will have no tax to pay on up to £5,000 of dividends. This zero per cent band is in addition to the personal allowance, although dividends in the band count towards total income, such as for the purpose of restricting the personal allowance or the high income child benefit charge. The new tax rates will be as follows:
|Basic rate tax payer||7.5%|
|Higher rate tax payer||32.5%|
|Additional rate tax payer||38.1%|
You will therefore be worse off if you receive dividends of more than:
|Basic rate tax payer||£5,000|
|Higher rate tax payer||£21,666|
|Additional rate tax payer||£25,250|
Depending on your circumstances, you may therefore want to consider accelerating to 2015/16 or delaying to 2016/17 dividends if you hold shares in companies in which you can influence the dividend policy.
There is an annual exemption for CGT of £11,100 for 2015/16. Like the personal allowance for income tax, this CGT annual exemption cannot be carried forward to a future year if unused. If you’re married, both you and your spouse each have an annual allowance so you may want to consider transferring assets to ensure the exemption is not lost.
The 2015/16 overall limit for ISAs is £15,240. This can be invested in cash or stocks and shares. Any income or gains arising on the investments will be tax free.
EIS, SEIS and VCT investments
There are various tax advantages to be gained from making investments into Enterprise Investment Scheme (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT) vehicles.
Gifts of £3,000 can be made annually with no impact on the nil rate band of £325,000 or IHT charge. If you don’t reach the £3,000 limit, it can only be carried forward for one year. There are also reliefs on gifts to any one person of up to £250 annually and gifts out of the transferor’s income, although – as ever – various conditions have to be met.
All of the above are areas which can be addressed as an individual approaches the tax year-end. Some may require substantial action in advance, for instance complications arising from changes to dividends, and so it is important to act now and begin addressing these issues with your wealth adviser.
About the Authors:
Tom has been advising doctors for over a decade now. In particular, he has focused on guiding NHS consultants and GPs through the complexities of their pension schemes. He works closely with clients through a regular review process to ensure their short, medium and long term financial objectives are met. Areas of Expertise include NHS pension advice, financial planning for doctors, passive investment strategies.
Aloysia Daros is a senior tax manager at Smith & Williamson. She has been with Smith & Williamson for 10 years as a Landed Estates and Bloodstock Tax Advisor, and as a senior tax manager.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details were correct at the time of writing.
The tax treatment depends on the individual circumstances of each client and may be subject to change in future.
The Financial Conduct Authority does not regulate all of the products and services referred to here.