Waste not want not

One of the most important issues to consider is the 60 per cent marginal rate band. Once an individual’s income exceeds £100,000, their personal allowance is withdrawn at a rate of £1 for every £2 of income. This results in a marginal tax rate of 60 per cent between £100,000 and £121,200. There are a number of ways in which individuals can reduce their taxable income in this situation.

One of the most important issues to consider is the 60 per cent marginal rate band

Pension contributions

Pension contributions (including tax relief at source) reduce income for the purpose of the 60 per cent band. The contribution must be made during the tax year in question, and, therefore, this route works well where an individual’s income is certain (such as an employee). Self-employed individuals, where their profits will only be known after the year end, are in a more difficult position.

The pension contributions on which an individual can obtain income tax relief are restricted to the lower of their ‘net relevant earnings’ (with a lower limit of £3,600) and the annual allowance, which is currently £40,000. It is also possible to carry forward any unused annual allowance for three years. However, the individual must have been a member of a registered pension scheme during each of the relevant tax years.

Gift Aid donations

Another way in which an individual can mitigate their marginal tax rate of 60 per cent is through a Gift Aid donation to a registered charity. A qualifying donation is treated as being paid net of basic rate tax.

The income tax relief available on such a donation can either be claimed in the tax year in which the donation is made, or carried back to the previous tax year prior to the tax return for that year being submitted. As such, it is possible to make a donation and claim the relief retrospectively, once the individual has calculated their tax position and determined that they fall into the 60 per cent band.

Salary sacrifice

Many companies now offer individuals the option of giving up an element of their salary for a non-taxable benefit under a salary sacrifice arrangement. Examples of this include pension contributions, cycle-to-work schemes and childcare vouchers.

Such an arrangement reduces the individual’s total income, which is the barometer against which the availability of the personal allowance is tested.

Other pre-year end planning

There are a number of other opportunities individuals should be thinking about at the end of the tax year.

Capital gains tax

Each year an individual receives a capital gains tax annual exemption, which for the 2015/16 tax year is £11,100. If this is not used, it is lost. If an individual has any assets which have an unrealised gain, then it may be worthwhile crystallising these gains to make use of this exemption. Conversely, if an individual has already made large capital gains during the tax year, then it may be worthwhile to sell assets that are held at a loss in order to crystallise the capital loss. This loss can then be offset against their gains of the same tax year, reducing their capital gains tax liability.

If the assets being sold are shares, they cannot be reacquired within 30 days of the sale, under the ‘bed and breakfast’ rules.

Isa allowance

Each year an individual is entitled to an Isa allowance, which for the 2015/16 tax year is £15,240. Any savings or investments that are held within the Isa wrapper are tax-free, and will remain tax-free until they are withdrawn. This is again an annual allowance, and therefore any unused Isa allowance is lost and cannot be carried forward.

Enterprise Investment Scheme (EIS)

Individuals can make investments under the EIS, which offers a number of valuable tax reliefs for individuals who subscribe for shares in qualifying companies. These are usually small companies looking to raise equity capital. However, there are strict criteria that need to be met in order for an investment to qualify.

Income tax relief is available on the initial investment in the company at a rate of 30 per cent, and this can be claimed either in the year in which the investment is made, or carried back one year. In addition, provided that the shares are held for more than three years, they are also exempt from capital gains tax. There is also the opportunity to defer capital gains arising on the sale of other assets into these shares, which delays the date on which the capital gains tax becomes due. The maximum qualifying investment is £1m per tax year.

Venture Capital Trusts (VCTs)

Individuals can also invest into VCTs, which themselves invest in small businesses. Again, there are strict criteria that need to be met, and the maximum investment on which tax relief is available is £200,000. Income tax relief is available on qualifying investments at 30 per cent, although this is only available in the year in which the investment is made. If the shares are subsequently sold within five years, the income tax relief originally claimed would need to be repaid. Any dividends received on qualifying VCT shares are-tax free, and these shares are also exempt from capital gains tax.

Annual inheritance tax gift allowance

It is also worth considering the £3,000 annual inheritance tax gift allowance. Any unused element of this allowance can only be carried forward one year before it is lost. There is also a £250 small gifts exemption for gifts to any recipient, which if not used during a tax year is lost.

Dividend changes

An additional consideration for this year is regarding dividends. In the July 2015 Budget, it was announced that there would be a change in the tax treatment of dividends, with an increase to the effective tax rates of 7.5 per cent and the scrapping of the notional tax credit.

Although a personal dividend allowance of £5,000 is being introduced, this change is likely to severely impact those individuals who receive the majority of their income from dividends. As a result, it may be worthwhile for business owners to consider whether to take an additional dividend prior to the end of the tax year. This will, of course, only be possible where the company has sufficient retained earnings. However, in the right circumstances such a dividend could result in a significant tax saving.

Summary

There are a number of options available to individuals who wish to mitigate their tax liabilities. However, the majority of these require action before the end of the tax year. It is therefore important to review the options as soon as possible so the opportunities are not wasted.

Simon Baylis is partner in the private client team of accountancy firm Moore Stephens

Key points

Despite tinkering from the Chancellor, there is still legitimate tax planning which can be considered.

Each year an individual is entitled to an Isa allowance, which for the 2015/16 tax year is £15,240.

An additional consideration for this year is regarding dividends.