It can be tempting to try to think about tax as little as possible, and many will have only just started to get over the stress of the 31 January filing and payment deadline.
But just around the corner is a brand new tax year, starting on 6 April. This provides a welcome opportunity for all taxpayers to review their tax affairs in advance, to ensure valuable tax allowances and reliefs are not wasted. Making the right decisions now in order to optimise your tax position might make next January just that little bit easier.
With this in mind and as we enter the final weeks of the 2017 to 2018 tax year, I have set out below a list of common sense tax planning to consider.
The tax with the most day-to-day aspect is income tax. While the top rate of income tax is currently 45 per cent, there are a number of artificial spikes. Action could be taken to mitigate the impact, as follows:
• Do not allow clients to end up paying 60 per cent tax. The personal allowance begins to be phased out if income is greater than £100,000. This year the personal allowance (£11,500) is restricted where income is above £123,000 which can result in an effective 60 per cent rate of tax on your income within this range. If you are affected by this, it is worth considering making pension contributions or charitable donations to reduce the impact.
• Involving the family should also be explored. If the spouse or civil partner does not have sufficient income to utilise their personal allowance or their basic rate and higher rate tax bands (20 per cent on income up to £33,500 and 40 per cent on income between £33,500 and £150,000), consider gifting income producing assets to them. It is important to note however that for this planning to be effective the gift has to be absolute with no strings attached and the capital gains tax position must not be overlooked. Specific stamp duty land tax advice is also recommended when the asset concerned is real estate.
- The new tax year starts on 6 April
- Remember to use your client's pension allowances
- Tax-efficient investments are one way of saving tax
There is a general concern that pensions have fallen out of favour, particularly with the number of restrictive changes the government have made in recent years. But pensions remain a staple of tax planning and are very tax efficient. There are limits to what can be contributed, and specialist advice would be needed. Clients should consider:
• Using brought forward pension allowances. Make use of the pension annual allowance which can give tax relief on income. Unused pension allowances from prior years carries forward for three years, but then falls away; if your clients do not use it, they will lose it. As explained above, the use of pension contributions is particularly beneficial when an individual’s earnings fall within the £100,000 to £123,000 effective 60 per cent tax band. There are various limits on the amount which can be restricted, which should not be overlooked otherwise a tax charge may be triggered.