Making the most of your tax allowances and reliefs

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. 

Income tax 

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.

Key Points

• 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

Pensions

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.

• Claiming an extra £720 by contributing into a family pension scheme is also an option. Any UK resident can contribute up to £2,880 (net) into a pension, irrespective of their earnings, and the pension provider is able to obtain 20 per cent tax relief from HM Revenue & Customs. This means the pension is credited with an extra £720 so that the gross contribution amounts to £3,600. Therefore, taxpayers should consider contributing to a pension for a non-working spouse/civil partner or children to benefit from this available tax rebate.

Capital gains tax (CGT)

CGT rates are currently favourable compared to income, at 20 per cent (or 28 per cent in some cases). There are important points to bear in mind however, as follows:

• Do not forget your CGT tax-free amount. If you have the ability and flexibility, consider realising capital gains before the end of the tax year in order to utilise the annual exempt amount (£11,300 this tax year). If you do not use the annual exemption it cannot be carried forward and is lost. Each individual has their own tax-free amount, so clients could consider also gifting assets to their spouse or civil partner (which is tax neutral) so that they are able to make a disposal and use their own CGT annual exemption.

• Claiming previous losses is also an option. If a client has sold any assets and realised a loss, make sure they claim the loss on their tax return.  If they do not claim the loss within four years, the loss is effectively forfeited. Therefore, capital losses for the tax year 2013 to 2014 not previously claimed should be claimed by 5 April 2018.

Inheritance tax (IHT)

The old cliché of death and taxes is never as relevant as for IHT. Many individuals prefer not to think about this, but each year a number of use it or lose it reliefs are available which can add up to significant savings:

My first tip is that gifts of up to £3,000 in total can be made each year without any IHT implications. If the £3,000 exemption was unused in the previous tax year, this can also be carried forward so the maximum available exemption can be up to £6,000.

Tip number two is other exemptions are available, for example for small gifts of up to £250 per recipient and gifts in consideration of marriage of up to £5,000 by a parent.

My third tip is regular gifts out of a surplus income are not subject to IHT, so being able to show a pattern of gifts can remove this from a person’s estate immediately. To be accepted, you must be able to show you have maintained your standard of living after the gifts.

Investments and dividends

Tax-efficient investments should also be considered as part of any tax planning exercise and Isas are an obvious solution:

Make full use of the Isa allowance. For 2017 to 2018 the maximum investment is £20,000, and for junior Isas is £4,128 for children under the age of 18. The annual Isa limit can be split between cash and permitted investments, such as stocks and shares.

Claim your Help to Buy Isa bonus. Consider the Lifetime Isa (Lisa). Income and gains within the Lisa will be tax free, as with a normal Isa, but in addition the government will top up contributions with a bonus of 25 per cent, up to a maximum of £1,000. But be wary of the penalties when withdrawing funds, otherwise you could be penalised with a tax charge of 25 per cent of the amount withdrawn.

There is limited time left to use the £5,000 dividend allowance. Each individual has a dividend allowance of £5,000 until 6 April 2018 when it will reduce to £2,000. 

If you own your company you could also consider declaring a dividend before the end of the tax year to utilise your dividend allowance, which can be worth up to £1,905 for an additional rate tax payer. 

It is also worth considering transferring shares to a spouse or civil partner if they have not used their own dividend allowance to double the tax relief.

Robert Pullen is a director at Blick Rothenberg