We outline some tax tips to help ensure individuals utilise their tax allowances and maximise their tax efficiency.
For most individuals, the pensions annual allowance is £40,000 (or 100% of earnings if less). For individuals in a position to make use of their annual allowance, and are not at risk of exceeding the £1.03 million pension lifetime allowance, making additional contributions now is generally advisable from a tax perspective. Individuals receive tax relief on those contributions (the government essentially pays in an additional amount to individuals’ pensions when they make contributions!) at a minimum of 20%, but higher levels of tax relief are available to those paying tax at the higher or additional tax rates.
In addition, unused allowances from the previous three tax years can be carried forward.
The annual allowance is tapered down to a minimum of £10,000 for high-earning individuals, and any contributions exceeding the annual allowance will receive no tax relief and individuals will be faced with an annual allowance charge, so careful planning needs to be considered when making contributions.
Individuals can also make a contribution of up to £2,880 into a child’s pension, which will be topped up to £3,600 with tax relief. This is often an excellent form of financial planning as it provides the child with a significant head start when saving for their long-term financial future.
This year’s ISA allowance remains at £20,000 per tax year. Investments within an ISA can generate income that is free of income tax and can generate capital gains without there being any charge to capital gains tax.
Individuals can also make contributions into Junior ISAs of up to £4,260 per tax year for each child.
The dividend allowance enables shareholders to receive tax-free dividends of £2,000 per tax year. In addition, the basic rate of tax on dividends in excess of the allowance is 7.5%, rising to 32.5% for higher rate taxpayers. If individuals are basic rate tax payers and they have distributable profits in their company, the general advice is to best utilise the lower tax rates as far as possible.
When dividends are added to the various other ways to extract profit from a company, such as salary, pension contributions, benefits-in-kind, rent and interest payments among others, as well as looking at how these could be paid to family members to increase tax efficiency, there is a lot of scope to extract profits from a company in a tax efficient matter to make best use of available allowances and lower tax rates.
As a general rule for all businesses, whether they are sole traders, partnerships or companies, it is advisable from a tax perspective to ensure expenditure is incurred before the end of the tax year or the accounting period, rather than just after, so that tax relief on that expenditure is realised sooner.
Capital gains tax (CGT)
Individuals can each make capital gains (profits on the sale of assets chargeable to CGT) of up to £11,700 in the current tax year without having to pay any CGT, by utilising their annual exemption.
Any unused annual exemption cannot be carried forward to future tax years so from a tax perspective, it is generally advisable to ensure that assets are sold before 5th April so that the current year annual exemption isn’t wasted and the following year’s annual exemption is available to utilise against any future asset sales.
On the other hand, if the disposal is a one-off, individuals may wish to consider delaying selling the asset until after 5th April so that it falls into the next tax year, therefore delaying the need to pay any CGT by another year.
In addition to the above, there are numerous tax planning opportunities available for couples, such as transferring assets or parts of assets between spouses and civil partners to utilise their annual exemption. The transfer of an asset to a spouse or civil partner is not subject to CGT, and the combined annual exemption between spouses and civil partners is £23,400.
Inheritance tax (IHT)
Gifts made by individuals are potentially chargeable to IHT. When made by an individual during their lifetime and these are made to another individual, these gifts are commonly referred to as potentially exempt transfers (PETs). If the donor does not survive 7 years from the date of the gift, the gift will be subject to IHT.
There are a number of IHT exemptions available which enable individuals to make gifts in their lifetime without making a PET and therefore not having to worry about the 7 year rule. These are briefly outlined below.
Annual exemption - Individuals can make gifts up to a total of £3,000 per tax year free of IHT. Unused exemptions can be carried forward for one year, so £6,000 can be gifted in a tax year free of IHT if the previous year’s annual exemption hasn’t been utilised.
Small gifts - Gifts of up to £250 per donee per tax year can be gifted without an IHT charge. There is no limit to the number of donees/individuals the donor can make these small gifts to.
Gifts on marriage – Gifts made in the event of marriage carry their own exemptions. £5,000 can be gifted to children in the event of their marriage and £2,500 to grandchildren. There is also a £1,000 exemption on gifts to any other individuals getting married.
Normal Expenditure out of income – Gifts can be exempted from IHT if they are made regularly and out of excess income. The donor must have sufficient income after their usual living expenditure and after making the gifts (and the gifts must be regularly made and form part of the donor’s normal expenditure) to maintain their usual standard of living. This exemption is used most by individuals who have high levels of income but modest living costs.
As you can see, there are a myriad of different tax planning opportunities (and there are many more than just the ones listed here), and it is often difficult to decide what route to go down, so seeking professional advice is strongly recommended.
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