As the 5th April approaches it is important to ensure that you have considered any reliefs and exemptions which could assist in reducing your tax liability for 2018/19.
BASIC RELIEFS 2018/19
Personal Allowance - £11,850 (reduced by £1 for every £2 over £100,000), increasing to £12,500 for 2019/20
Savings Allowance - Basic rate taxpayers £1,000, higher rate taxpayers £500
Dividend Allowance - £2,000
Capital Gains Tax (CGT) Allowance - £11,700, increasing to £12,000 in 2019/20
Trading and Property Income Allowances
Valuable reliefs of £1,000 each can apply where your annual gross property income is £1,000 or less, or where you make under £1,000 from trading income from providing casual services, such as babysitting, self-employment, or hiring out personal equipment. Whilst you must keep records, such income does not necessarily need reporting on a SA100 (unless you are already submitting one).
PLANNING WITH YOUR PARTNER
Where you cannot utilise your all your Personal Allowance for 2018/19 you can transfer £1,190 to your spouse or civil partner which can reduce their tax by up to £238.
To be eligible to make the transfer, your partner’s income must be between £11,851 and £46,350 (i.e. subject to tax at basic rate). You must claim the allowance and can backdate it to include any tax year since 5 April 2015 where eligible.
Transferring Assets to Spouse or Civil Partner
Another option where one of you doesn’t earn enough to utilise a personal allowance, but the other is subject to higher rates of tax is to transfer assets. For example, you could transfer shares to a partner, so that dividend income is assessed on them at 7.5% instead of 32.5%, or indeed to utilise their £2,000 dividend allowance. Care must be taken though, as any transfer must be an outright gift, on a no-strings attached basis.
Child Benefit gets withdrawn by 1% for every £100 of income earned over £50,000 (based on the income of the highest earner), being reduced to nil once income reaches £60,000. The £50,000 is based on your “adjusted net income” which on top of your basic salary includes benefits such as company car or private medical insurance. However, this figure is reduced by any charitable donations and pension contributions you make in the year. Parents are currently being urged to check their position regarding Child Benefit, for fear of large backdated tax bills where they have continued to receive the benefit when they are longer been eligible.
Where someone is on the cusp of a change in tax circumstances, it may be preferable to save tax by utilising pension contributions or charitable donations.
Charitable donations – When you “gift aid” a donation, the charity can claim back basic rate tax of 20% on the gross amount of the donation, so for example, if you gift aid £100 to charity, the charity actually receives £125. However, did you know that as a higher or additional rate taxpayer you can also claim back the difference between those higher/additional rates and basic rate through your tax return. So, on the £100 donation, a higher rate taxpayer would get £25 back in tax, and an additional rate taxpayer would receive £31.25 back.
Pension Contributions – There is an annual limit of £40,000 for tax deductible pension contributions for those with incomes of under £150,000. There is also scope to utilise unused pension allowances for the last three tax years. Tax relief of 20% is added either at source, or by the pension provider depending how your pension is set up. If you are taxed above basic rate you can claim additional relief to your marginal rate through your self-assessment tax return.
Even if you do not have any pensionable earnings, you can still pay into a stakeholder pension each year up to £2,880 net, and the provider will claim the 20% tax relief to take this contribution up to £3,600. These pensions can be useful for non-working spouses or children. The funds will not be accessible until pension age (currently 55).
TAX EFFICIENT INVESTMENTS
Individual Savings Accounts (ISAs)
The subscription allowance for ISAs for 2018/19 is £20,000 and you can invest in cash, UK stocks and shares, foreign shares, corporate bonds and any other permitted investments.
Cash ISAs are available to those over 16, and investment ISAs from age 18.
Junior ISAs are available for children under 18 who are living in the UK. You can pay up £4,260 per annum which can be made up of any combination of cash/stocks and shares. Usually if a child receives money directly from their parent, the parent would be taxable on all income arising from the gift where it exceeds £100. These rules do not apply to Junior Tax ISAs, enabling you to gift to your children more easily. There are no withdrawals until the child is 18 when they become entitled to the money.
All prizes are tax free
Higher Risk Tax Efficient Investments
VCTs (Venture Capital Trusts) have annual investor limits of £200,000 and give income tax relief of 30% on newly-issued shares which must then be held for at least 5 years. Dividends are paid free from income tax, and CGT will not be due on qualifying disposals.
EIS (Enterprise Investment Schemes) has an annual limit of £1,000,000 to receive income tax relief of 30% (or more subject to certain conditions). You cannot claim back more than the Investor’s tax payable and the shares must be held for three years or the relief is withdrawn. After this time the shares can be disposed of free of CGT. The shares also offer an option to defer gains.
There are other similar higher risk investment reliefs such as the Seed Enterprise Investment Scheme (SEIS).
Changes to Entrepreneurs’ Relief
Entrepreneurs’ Relief (ER) is a valuable relief that can reduce an individual’s CGT liability on the sale of a business or qualifying shares from 20% to 10%. To qualify, certain conditions must be met during a holding period that generally ends on the date the relevant shares are disposed of.
The Autumn Budget introduced two important changes. From 29 October 2018 two additional conditions in relation to the economic rights of shares must be met for a disposal of shares to qualify for the relief, and from 6 April 2019 the ‘holding period’ will increase from one to two years. Therefore, if a disposal is imminent, careful consideration needs to be given to the changes in the rules.
THE BENEFITS OF HAVING A TAX ADVISER
Preparing tax returns is a job most of us would prefer not to do. Handing the pain over to a tax adviser, not only takes that stress away but also means that you have someone to spot the deductions and allowances you can apply to your income. This means you won’t be handing over any more tax than is necessary.
If you would like any further help with any of the tax minimising options discussed above, or have any other questions, please do not hesitate to contact Ruth Taylor on 01908 597 904.