Failing to plan is planning to fail

  • To catch up with personal taxation rules
  • To understand the importance of planning at the tax year end
  • To make sure you have covered all the basics to the end of the tax year
Failing to plan is planning to fail

All financial advisers know that tax planning is not limited to January through to the end of March and advisers will, in practice, be helping their clients throughout the year.

Nevertheless, the UK tax system does conspire to produce an annual hive of activity which, while not ideal, generates a natural call to action that advisers would be foolish to ignore. Every year there are annual allowances that will expire if unused and time limits for claiming exemptions and reliefs ending on the 5 April. Every year too there will be nuances relevant only to that tax year and 2016/17 is no exception. 

Income tax

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Inevitably, much attention is focused on income tax, which for most individuals represents their greatest tax exposure and impacts day-to-day disposable income. 2016/17 has seen personal allowances increase to £11,000, but progressively withdrawn for individuals earning more than £100,000, leading to a marginal rate of 60 per cent on income between £100,000 and £122,000.

In addition, the year saw the introduction of a personal savings allowance of £1,000 for basic rate tax payers and £500 for higher rate taxpayers, and a dividend allowance with the first £5,000 taxed at 0 per cent. Less understood is that although no tax is due on income within either allowance, income received is taken into account when calculating any marginal rates of tax on taxable savings and dividend income.  

Here are things to consider when planning ahead:

• Look to reduce taxable income, particularly where it falls marginally above one of the thresholds. This could be achieved using pension contributions, investments into enterprise investment schemes (EIS) or venture capital trusts (VCT), making payments to charity or transferring income-producing assets to a spouse/civil partner with a lower income. 

• On a similar vein, employees could consider taking tax-free alternatives instead of a bonus or salary. It is common for employers to offer arrangements allowing employees to exchange a cash payment for approved share options, benefits in kind or pension contributions via salary sacrifice. 

• For clients with children, there may be an option to switch income from one spouse to the other such that both spouses' income remains below the £50,000 threshold for the purposes of the child benefit charge. 

• Given the tax changes to buy-to-let investors from 6 April 2017, which will ultimately, from April 2020, result in tax relief on interest being limited to the basic rate of tax, it may be appropriate to consider releasing equity. Where a client has substantial equity, increasing the borrowing to release capital into an asset that produces a tax-free return or capital-only return could result in an increase in the overall net return from capital assets.

• Remaining on the theme of property, clients could consider incorporating let properties into a company, consider using the rent-a-room relief, which has, from 6 April 2016, been increased from £4,250 to £7,500 per year, or look at the very generous furnished holiday lettings rules, which can, in the right circumstances, provide income, capital gains tax (CGT) and IHT benefits.