5 April fast approaches, so take the opportunity to use up all allowances, relief and exemptions, says Paula Fraser
With just three weeks until the end of the tax year there’s still time to take advantage of a few simple money-saving opportunities – but move quickly or you could lose out.
The 2014-15 tax year ends on 5 April and with it so does the chance to use up some of your annual exemptions, allowances and reliefs. It’s also a good time to make sure you’re paying the right amount of tax and that you’re aware any potential tax traps you need to avoid.
Tax planning is not the most exciting task in the world, admittedly, but it can make a lot of sense and save you a good chunk of money. Here’s a few options to look at:
Maximising personal allowances and tax bands
Are you making the best use of your personal allowances and tax bands?
• The higher income tax rate threshold is £41,865
• Child benefit begins to be clawed back if either parent earns more than £50,000
• Because of the abatement of the personal allowance, there is effectively a 60 per cent income tax rate on earnings between £100,000 and £120,000
• Income over £150,000 in one year will be subject to the highest rate of tax, 45 per cent. If your taxable income is at, or near, certain thresholds there may be things you can do to reduce it and potentially move into a lower tax band. For example, married couples and civil partners could gift assets to each other to ensure personal allowances and basic tax bands are used up before stepping up to the next rate of tax.
Savings and investments
Your income is subject to income tax when it is received.
In some cases it may be worth rearranging investments so that the income they generate for you is deferred. For example, you could delay receiving income from investments until a time when you anticipate that you will be paying tax at a more beneficial level.
Where possible, try to utilise your full annual individual savings accounts (Isa) allowance – £15,000, rising to £15,240 on 6 April – and also consider other forms of tax-efficient investments, such as the enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS) or venture capital trusts (VCTs).
Where available, this allows employees to take reduction in salary in return for non- cash benefits such as private medical insurance or gym membership. The reduction in income then provides income tax and national insurance contributions (NICs) benefits. Savings can be particularly worthwhile if your income is close to a tax threshold.
Tax deductible payments
Tax relief can be claimed at your highest marginal rate in relation to any charitable donations made under gift aid. In some cases, relief may also be available for interest payments made on a qualifying loan which is used for a specific purpose such as investing in a close company, a partnership, shares in an employee controlled company or paying an inheritance tax liability. Strict rules apply and for some there is an overriding cap on the amount of tax relief any one individual can claim in one year.
Pensions are still the most popular tax-efficient investment for people. It is therefore a key area to look at before the end of the tax year as there are potential tax relief opportunities of up to 45 or even 60 per cent in some earning bands.
The pension annual allowance was again reduced from 6 April, 2014, taking the amount that can be saved tax-free each year to £40,000. It is worth remembering that it might be possible to carry forward any unused allowances from the previous three tax years into this tax year to help maximise your contributions. Consequently, this is now your last chance to use up your full £50,000 allowance from the 2011-12 tax year.
Another consideration is that the lifetime pension allowance has also been reduced to £1.25 million. Any amount over this threshold will be taxed at 55 per cent if taken as a lump sum, or at 25 per cent plus income tax at your prevailing tax rate if you take it as income. Anyone in the enviable position of being likely to exceed that lifetime allowance in the future should investigate ways of protecting their fund now.
All pension pots are added together and treated as one in terms of allowance assessment. Final salary schemes are not exempt. Anyone in a scheme that promises an income of £62,500 may be affected by this new lifetime allowance because this future income is multiplied by twenty in the assessment process to provide an equivalent cash fund.
Those looking to make use of the greater flexibility in accessing their pension funds when new rules take effect in April should look into the potentially significant tax implications of doing so.
Bonuses and dividends
Any bonus or dividend payments you receive could also have tax implications. You could maximise your thresholds from a tax planning perspective if you defer a bonus payment into the next tax year or alternatively, bring it forward into the earlier tax year. The strategic waiving of a dividend can also be an option in the tax planning armoury in a similar way.
• Paula Fraser is director in the tax team at Grant Thornton in Scotland.