As the financial year begins, act promptly in this uncertain political climate, writes Paula Fraser
THE start of the new financial year offers a fresh chance to ensure you’re not missing out on easy opportunities to cut your tax bill – but linger too long and you could miss the boat.
Taking a few moments now to identify and then maximise the possibilities this milestone offers, rather than leaving it until next March, could really pay dividends.
It might seem daunting at first, but it’s worth making the best of your annual allowances, exemptions and statutory reliefs effectively because otherwise you may well be losing out unnecessarily. Here are some of the areas to think about.
The much heralded new flexibility in taking pension income has now come into force and people aged 55 or over will have far more decisions to make about drawing their benefits. For some this may mean dipping into their pension pot to take a mixture of tax-free cash and income, but for others the guarantees provided by an annuity will still be the right choice.
Bear in mind that not all pension providers will offer this to their customers and some retirees may need to transfer their benefits to another company before having full access to their funds.
The lifetime pension allowance will be reduced from £1.25 million to £1m in April 2016, although new forms of protection for those affected by this will be announced later this year. From 2018 the lifetime allowance will be indexed in line with the consumer prices index.
As with all pension and retirement planning, it is vital to seek independent financial advice before taking any action.
Savings and investments
Planning ahead and using tax efficient allowances makes a huge amount of sense when it comes to investments. The recent Budget encouraged people to save and access their savings tax efficiently with further incentives.
Some of these changes won’t take effect till the next tax year, such as the introduction of a new tax-free personal savings allowance of £500 for higher rate taxpayers and £1,000 for basic rate taxpayers on interest generated from savings income. This new allowance is expected to exempt around 95 per cent of taxpayers from paying any tax on the interest element of their savings income.
New rules that come into effect this Autumn will provide greater individual savings account (Isa) freedoms within this financial year. You will be able to make withdrawals from your Isa account and make deposits back into it without losing Isa tax benefits, provided the money is deposited within the same financial year doesn’t exceed the maximum limit of £15,240 in 2015/16. This will give greater flexibility and remove some of the traditional barriers to making investments into an Isa.
Given the new tax year and therefore the renewal of investment thresholds it is also worth considering whether to invest or revisit investing in alternative options such as the enterprise investment scheme (EIS) or venture capital trusts (VCTs).
The Budget also included the introduction of a Help to Buy Isa from Autumn 2015. The Help to Buy ISA effectively provides a 25 per cent top-up for first time buyers. The top-up is capped at £3,000 for those saving £12,000. This Isa will be available per person rather than per property.
Unfortunately, the measure fails to deal with the current housing shortage and the lack of supply of suitable housing. Therefore, we are concerned the boost provided through these measures could result in higher demand and ultimately lead to higher house prices.
There are other options available to help your children get their foot on the property ladder, such as a straightforward cash gift.
and tax bands
The key to getting your tax right is make best use of your personal allowances and tax bands, and these have changed slightly since last year. People with taxable income up to £31,785 are basic-rate taxpayers and pay income tax at 20 per cent (with the new personal allowance of £10,600, this gives a threshold of £42,385). Those with taxable income over the limit pay tax at 40 per cent on income above the threshold.
The new tax year also sees the renewal of your £3,000 annual gift allowance for inheritance tax (IHT). Making the most of this exemption and other IHT gift exemptions (ie regular gifts out of excess income) can provide a very effective solution to many people’s inheritance tax concerns.
More change ahead?
Whatever the outcome of the forthcoming general election there is likely to be an emergency “second budget” in the summer, which would well lead to further changes to the UK tax system.
The last “second budget” back in 2010 provided the coalition government with a platform to make some radical changes – both good and bad. This might not act as a benchmark for a second budget later this year, but it shows the level of uncertainty taxpayers face in this political climate.
Although the risk of retrospective change is always there, it is now only really used in circumstances where the government perceives an element of avoidance.
As such it makes sense to start the new tax year by acting now and getting your tax affairs in order.
Paula Fraser is director in the tax team at Grant Thornton in Scotland