Legitimate tax planning – including using reliefs and allowances in the way that Parliament intended when introducing them – is entirely unaffected by HMRC’s clampdown on tax avoidance. With the end of another tax year on 5 April in sight, here are some ways taxpayers can legally manage their tax liabilities.
Personal allowances
• Ensure both spouses’/civil partners’ allowances are utilised:
- if a spouse/civil partner has insufficient income to utilise the full £11,000 personal allowance for 2016/17, consider transferring income yielding assets, to use up both personal allowances
- if neither partner pays tax at 40 per cent or 45 per cent, one can transfer up to 10 per cent of their personal allowance to the other, saving tax of up to £220.
• Reduce income to below £100,000/£150,000 thresholds: as the personal allowance is reduced by £1 for every £2 of net income over £100,000, the effective top rate for income between £100,001 and £122,000 is 60 per cent.
The top rate for income over £150,000 is 45 per cent. Individuals with incomes near these thresholds can reduce their tax liabilities by reducing their taxable income below £100,000 or £150,000. This can be done by changing income into non-taxable forms, deferring income, making pension contributions, making payments to charity or giving income yielding assets to a spouse/civil partner with lower income.
Investment income
• Receive dividends and interest tax free:
- The first £5,000 of dividend income is tax-free, so taxpayers with larger investment portfolios and business owner-managers should ensure that they take advantage of this allowance
- The personal savings allowance (£1,500 for basic rate taxpayers; £500 for 40 per cent taxpayers; £0 for 45 per cent taxpayers) also allows interest of up to those amounts to be received tax free.
• Increase tax-free Isa savings: the overall annual investment limit for standard Isas and lifetime Isas is increased to £20,000 for 2017/18, and the separate annual limit for Junior Isas is increased to £4,128.
Employment earnings
• Exchange salary for benefits: although it is proposed to limit the scope for exchanging taxable salary for non-taxable benefits for new arrangements from 6 April 2017 and for existing arrangements from 6 April 2018, it will still be possible to save tax and NICs by exchanging salary for the following types of benefit:
- Pensions and pensions advice
- Childcare
- Cycle to work schemes
- Company cars with CO2 ratings below 75 g/km
- Life assurance.
• Switch your company car: Choose a lower emissions car to save tax. If fuel has been provided for private use, consider whether fully reimbursing the cost to the company would be cheaper than paying the fuel scale charge, which is based on the car’s CO2 emissions.
Pensions
The first basic point is to ensure that the annual allowance (AA) for tax-deductible contributions (up to £40,000 for 2016/17, plus any unused amounts from the previous three tax years) have been fully utilised, where possible.
The AA is reduced by £1 for every £2 of an individual’s ‘adjusted income’ of over £150,000 if their ‘threshold income’ is over £110,000, down to a minimum AA of £10,000.
A particular deadline that taxpayers with pension funds of over £1.25m on 5 April 2014 should not miss is the 5 April 2017 deadline to claim ‘Individual Protection 2014’, which will protect those funds, up to a maximum of £1.5m, from a tax charge.
Generate tax-free cash from a spare room
The annual rent a room relief was increased from £4,250 to £7,500 from 6 April 2016, so individuals can now rent out a room in their main residence for up to £144 a week tax-free.
Enjoy tax-free or low tax capital gains
• Use the annual exemption: everyone, including minor children, can realise capital gains up to the £11,100 annual exemption tax free in 2016/17. If it is desired to retain share investments, they can be reacquired after 30 days without losing the benefit of a disposal that utilised the annual allowance.
• Remember entrepreneurs’ relief: gains of up to £10m on qualifying disposals of businesses or business assets will be taxed at only 10 per cent instead of the normal 20 per cent rate for higher rate taxpayers.
• Use the new investors’ relief: a lifetime limit of £10m is now available for gains realised by individuals (other than employees) who subscribed for shares in unlisted or AIM-listed companies to be taxed at only 10 per cent instead of the normal 20 per cent rate for higher rate taxpayers. To qualify, shares must be held for at least three years.
Larger tax-efficient investments
• Qualifying investments of up to £1m under the Enterprise Investment Scheme (EIS) and £100,000 under the Seed Enterprise Investment Scheme (SEIS) attract income tax relief at 30% and 50% respectively. A carry back claim made for a 2016/17 investment would reduce tax liabilities for 2015/16, accelerating tax relief. Disposals of EIS/SEIS investments are also potentially free of capital gains tax.
• Qualifying investments of up to £200,000 to a Venture Capital Trust also attract income tax relief at 30 per cent, with a potentially tax-free disposal.
EIS and VCT investments are frequently high risk and advice from a qualified Independent Financial Adviser is recommended.
Give to charity and carry back to accelerate tax relief
Consider making Gift Aid donations before 31 January 2017 to provide an early benefit to the charity, and elect for the donation to be treated as made in 2015/16 to accelerate tax relief.
Inheritance tax
Utilising the annual £3,000 gifts exemption and the exemptions for small gifts of up to £250 and larger regular gifts out of normal income should not be overlooked.
Dawn Register is a partner of BDO Tax Dispute Resolution
http://media.ftadviser.com.s3.amazonaws.com/FT-FA-Supp-Prudential-2017-01-19_PRESS.pdf
Key points
Legitimate tax planning is entirely unaffected by HMRC’s clampdown on tax avoidance.
Individuals with incomes near the £100,000 and £150,000 thresholds can reduce their tax liabilities by reducing their taxable income below £100,000 or £150,000.
Use the annual exemption on capital gains up to the £11,100 annual exemption tax free in 2016/17.
