The sun finally seems to be coming out across the UK, and it’s time to inject some of that Spring warmth into your financial planning. Now that a new tax year has started, this is the perfect opportunity to maximise the valuable tax allowances and reliefs that are available to you. Think about it this way: a little conscientious planning today could make next Jan 31st a lot easier on your pocket. Our 2018-2019 tax guide is available here.
Let’s start with some facts and figures…
Your personal allowance (the amount you can earn before you start paying income tax) has risen by £350 to £11,850. Above that, and up to a limit of £46,350, you will only pay the basic 20 per cent tax rate. If you earn above £46,350 you’ll pay the higher tax rate of 40% or the additional rate of 45%.
The sums get trickier if you’re earning £100,000 or more because your personal allowance will fall by £1 for every £2 you earn above that figure. This means that if you earn £123,700 or more, you won’t receive a personal allowance at all.
However, there are ways to mitigate that impact. For example, you could consider making pension contributions or charitable donations as an example to reduce some of this tax. You could also gift income producing assets to your spouse or civil partner if they do not have the income to utilise their personal allowance or basic rate and higher rate tax bands. You must give the gift with no strings attached and you should still factor in your capital gains tax position, but it’s still a much better alternative than handing over your hard-fought earnings to the tax man.
Although there have been no major changes to pension allowances this tax year, pensions can still be extremely tax efficient if you’ve got the right advice and specialist knowledge on your side. Because pension contributions receive full income tax relief, it only costs basic rate taxpayers £80 to save £100 (20 per cent tax relief) and higher rate tax payers £60 to save £100 (40 per cent tax relief). The other good news is that the lifetime pensions allowance is now £1,030,000 after being increased by £30,000 for the 2018/19 tax year linked to inflation.
When it comes to taking the pain out of your income tax, it’s important to use your brought-forward pension allowance wisely. Unused pension allowances can be carried forward for three years, otherwise you’ll lose it completely. If your individual earnings fall within the £100,000 to £123,700 tax band, utilising pension contributions can be especially beneficial.
You could also claim an additional £720 by contributing into a family pension scheme and taking advantage of the 20 per cent tax relief given by HM Revenue & Customs if you contribute up to £2,880 net. This is usually for those with no earnings.
Capital gains tax (CGT)
Lower rate taxpayers pay 10 per cent on CGT and higher and additional rate taxpayers pay 20 per cent. There are exceptions, one being, selling a second property including buy-to-let investments. CGT on those will be charged at 18 per cent for basic rate taxpayers and 28 per cent for higher and additional rate taxpayers.
Here’s something to think about: if possible, consider realising your CGT before the end of the tax year so that you can utilise the annual exempt amount (which is £11,300 for this tax year). If you don’t use it you’ll lose it because the annual exemption cannot be carried forward. Also, because each individual has their own tax-free amount, you might consider gifting assets to your spouse or civil partner so that they are able to use their own capital gains tax annual exemption.
You could also use your tax return to claim on previous losses from sold assets, but you must claim within four years or the loss will be forfeit.
Inheritance tax (IHT)
Inheritance tax isn’t something most of us enjoy thinking about, but it can offer a lot of useful relief when used wisely. For example, you could gift a total of £3,000 each year without incurring any IHT and if you didn’t use your £3,000 exemption last tax year you could carry that forward one year too. Other exemptions are also available, like gifts in consideration of marriage of up to £5,000 by a parent, or £2,500 for a grandchild or great-grandchild.
Don’t forget that regular gifts given from a surplus income are not subject to IHT so long as you can prove they don’t have an impact upon your standard of living.
You can save a maximum £20,000 in an Isa this tax year, where your income and capital gains in the future are exempt from tax. This applies to Cash Isas, Stocks & Shares Isas and Innovative Finance Isas and you can distribute your allowance between all three types if you choose. The maximum investment limit for Junior Isas is £4,128 for children under the age of eighteen.
The Lifetime Isa (Lisa) is worth considering because it offers all the benefits of the normal Isa (income and gains will be tax free) but the government will also top up your contributions with a 25 per cent bonus, up to a maximum of £1,000. Watch out for withdrawal penalties though.
Facts and figures are useful, but here’s the bottom line:
It’s important to make the most of your tax allowances and reliefs, and to do that in the most effective way you need to start thinking about your tax year now and have expert advice on your side*. Here at Moyes, we can help you mitigate the impact of income tax and present you with legitimate financial solutions that won’t get you on the wrong side of the tax avoidance laws (you may have read recently about a landmark legal case where HMRC are ramping up its clampdown of potential tax avoidance, lengthening custodial sentences for tax fraud by 25 per cent). It’s important to know the rules if you’re going to use them to your advantage, and that’s why you need a trusted financial advisor on your side. Contact us today – our team are always here to help and make sure you receive the tax relief you deserve!
*It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only.