From allowances and savings tax breaks to pensions and tax-efficient investments, there are plenty of opportunities to cut your tax burden. Time is running out, however, with less than a month of the current tax year remaining.
Paula Fraser, tax director at Grant Thornton Scotland, offers her top tips on making the most of this year’s tax allowances.
1 Personal allowances
The personal allowance is the amount of income you can receive each year before it is liable to income tax. The threshold is currently £8,105, rising to £9,205 next month, while the age-related allowances are £10,500 and £10,600 for over 65s and over 75s respectively. These are being frozen at the current levels, in what has been dubbed the “granny tax”. Check if you have used up your annual personal allowances and are making maximum use of your basic/higher rate tax bands.
2 Gain from exemptions
You can make capital gains of up to £10,600 free of tax in the current tax year. This can equate to a capital gains tax (CGT) saving of up to £2,968 if you are a higher/additional rate taxpayer and £1,908 if you are a basic rate taxpayer. By taking advantage of “spousal exemption”, which allows married couples and civil partners to transfer assets between them free of tax, you could end up doubling your saving.
3 Use your Isa allowance
Individual savings accounts (Isas) can be a beneficial way for investors to build up a highly tax-efficient pot outside of their pension provisions. Individuals may invest up to £11,280 – including up to half in cash Isas – in the current tax year (rising to £11,520 in 2013-14) free from income tax and CGT on the proceeds.
4 Get the best from your pension
Pensions remain the most popular tax-efficient investment opportunity and are an important area of savings to consider before the end of the tax year. However, it was announced last December that both the annual allowance (the amount that can be saved “tax-free” each year), currently £50,000) and the overriding lifetime limit (currently £1.5 million) will be reduced with effect from April 2014. It will be important that you seek advice now to ensure you are doing all you can to maximise your pension contributions in this tax year and next.
5 Time it right
Perhaps the simplest tax planning opportunity is to consider the timing of non-contractual bonus and dividends to ensure that total taxable income for 2012/13 remains below £150,000. While complications may exist around the contractual nature of some bonus payments, where finances permit, you may consider deferring certain payments into 2013-14 when lower income tax rates will apply.
6 Salary sacrifice
Taking advantage of any salary sacrifice schemes offered by your employer can produce significant savings. With salary sacrifice, the employee agrees to take a reduction in salary in return for certain “non-cash” benefits provided by the employer. The resulting reduction in the level of income can provide income tax and national insurance contributions.
7 Tax-efficient investing
Tax-efficient investments such as the enterprise investment scheme (EIS) or venture capital trusts (VCTs) offer generous tax breaks to investors. Income tax relief at 30 per cent is available on qualifying investments, subject to an annual investment limit (up to £1 million for EIS and £200,000 for VCT), and subject to their having sufficient income tax payable to absorb the relief.
8 A new window of opportunity
Investors in the new seed enterprise investment scheme (SEIS), which is designed to encourage investment in small start-up businesses, can benefit from income tax relief at 50 per cent of the amount of qualifying investments made by an individual between 6 April 2012 and 5 April 2017, subject to a maximum investment of £100,000 a year. For SEIS there is also a temporary CGT holiday on gains realised during the 2012-13 tax year and reinvested in qualifying SEIS shares during the same tax year. This will also apply to capital gains realised on any asset during 2012-13.
9 Estate planning
Inheritance tax (IHT) is not only a tax on assets held at death, but also applies to some gifts made by individuals and transfers into most trusts.
10 Making provisions for children
You may be surprised to learn that parents and guardians may make contributions of up to £3,600 gross (ie a £2,880 net contribution) a year into a pension, and up to £3,600 a year into the new junior Isa for the benefit of their children (rising to £3,720 in 2013/14). All proceeds are tax-free for the child.