With the end of the tax year just around the corner on 5th April, here are some tax planning tips that you might wish to consider to maximise your tax relief during tax year 2018/19.
1. Maximise all the tax allowances
There are a plethora of tax allowances which help encourage a well-diversified income base and reflect modern day attitudes of sweating all your assets.
- Dividend Allowance allows you earn up to £2,000 in dividends without paying any tax.
- Personal Savings Allowance means you do not have to pay any tax on the interest received for savings up to £1,000 for basic rate tax payers and £500 of savings for higher rate tax payers. It disappears for additional rate payers.
- Starting rate of tax for savings of £5,000 means if your other income is less than £16,850 you do not pay any tax on interest received on savings up to £5,000. However, every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
2. Fully utilise the tax-free allowances
Some of the allowances don’t even use up your basic rate tax allowances and are not income dependent so these are really valuable:
- The Personal Allowance allows you to earn income of any sort up to £11,850 before you start paying tax.
- The Rent a Room Scheme allows you to earn up to £7,500 from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else. You can let out as much of your home as you want to for as little time as you want to. If you earn over £7,500, you can just take your rental income and deduct £7,500 instead of keeping track of all the actual expenses.
- The Property Allowance is a tax exemption of up to £1,000 a year on your share of gross rental income. However, it can’t be used against income already under the Rent a Room Scheme or income received from your employer or your company.
- The Trading Allowance allows you to earn self-employment or casual income of up to £1,000 each year. You can deduct £1,000 from your gross trading income instead of expenses if this gives a better tax result or is easier.
Marriage allowance lets you transfer 10% of your Personal Allowance to your spouse if they are a basic rate tax payer.
3. Maximise tax relief on pension savings
All individuals under the age of 75 who contribute into a personal pension scheme, can claim tax relief on pension savings of up to £2,880 regardless of the level of their earnings. Otherwise, your pension savings must not exceed 80% of your earnings in the year or £32,000 (unless you are an additional rate tax payer or you have already started drawing your pension). If you have any unused annual allowance from previous years, this can be added to £32,000 savings limit. We have quoted the net pension contribution limits as most individuals will make pensions savings net of basic rate income tax.
A higher rate tax payer will save £16,000 in tax from £32,000 pension contribution and if your income falls between £100,000 and £123,700 you could save up to £20,000 in tax.
4. Top up your Individual Savings Account (ISA)
Have you used your £20,000 ISA annual allowance? You are no longer forced to open a stocks & shares ISA to make full use of the allowance so you could put the whole £20,000 into a cash ISA, which is effectively a tax-free savings account. However, returns are generally much better in a stocks & shares ISA, which have become much less scary and much more accessible through digital wealth managers such as Nutmeg and Money Farm.
5. Utilise your capital gains tax exemption
When an individual sells a chargeable asset (such as shares or a property which is not their main home) for more than its purchase price, there may be a capital gains tax liability at 10%, 18% or 28% depending on the type of asset and whether they are a basic or higher rate tax payer.
However, an individual can make tax-free gains of up to £11,700 each year. So it is worth planning to spread the sale of assets over a number of tax years if possible. The date of exchange of contracts determines which tax year a gain falls into. Remember that capital gains tax can also apply when assets are gifted, such as passing assets to the next generation.
Also make sure that the losses where an asset is sold for less than its original purchase price are recorded on your tax return as these can be used to reduce future capital gains and reduce the resultant tax payable.
6. Avoid the high income child benefit charge
If you have adjusted net income over £50,000 and you or your partner gets Child Benefit then the Child Benefit could be subject to a claw back at a rate of 1% of child benefit received for every £100 of income above £50,000. At £60,000, the full child benefit will be clawed back.
It may be possible to arrange your affairs so that neither member of a couple has income above £50,000. Gift aid donations and personal pension contributions are deducted from your taxable income to give your adjusted net income.
7. Record Gift Aid donations
Donations by individuals to charity or to community amateur sports clubs (CASCs) are tax free. The tax saving then goes to either you or the charity depending on how you have donated:
- through Gift Aid
- straight from your wages or pension through a Payroll Giving scheme
- land, property or shares
- in your will.
Keep a record of all charitable donations that you make throughout the tax year and we can then ensure that they are added to your personal tax return. Sometimes missed charitable donations can result in higher tax rates being paid if your income is close to a tax band change.
During March each year, Pillow May checks the personal tax position of all company directors to ensure that they have withdrawn remuneration efficiently from their personal companies and to advise them of their personal tax liabilities for the following January. We then advise on a suitable remuneration strategy for the following new tax year, based on the budget announcements for that year.
If you would like us to complete a pre-tax year-end planning review of your affairs, please contact our Payroll Manager, Ruth Phelps.