The end of one tax year – and the start of another – is always a good time to make sure your financial arrangements still suit your circumstances. It’s especially important when new rules are coming into play... as they are this time around. Our 7 tax year end tips will help you make sure you aren’t missing a trick.
1 Transferring income to your spouse
Married people can make use of both spouses’ personal income tax allowances by transferring taxable assets to your spouse if he/she doesn’t use their full allowance. For example, you could transfer a deposit account in your name into your spouse’s, so that the interest becomes theirs. The same applies to share dividends, income from property and income from investment funds such as OEICs (open-ended investment companies).
2 Using pension contributions to lower your tax bill or qualify for extra benefits
People who earn more than £50,000 lose their child benefit gradually until their income reaches £60,000 – at which point they lose the lot. A pension contribution has the effect of reducing your taxable income. For example, if your income was £60,000 and you paid £10,000 into your pension, this would have the effect of reducing your income (for the purpose of calculating child benefit allowance) to £50,000. Not only will you get 40% tax relief on any money you pay into your pension, if you’ve got two kids, you’ll also reclaim £1,788 in child benefit. Child benefit for two children alone is equivalent to a pay rise of over £3,000, when you take income tax and national insurance into account.
The same principle holds true for those people who have taxable income of more than £100,000. People in this position gradually lose their personal allowance until it reaches zero (in 2016/17 this point would be reached by the time their income hit £122,000).
3 Making use of your capital gains tax allowance
Stay aware of your capital gains tax allowance if you’re disposing of assets. The allowance for 2016/17 is £11,100, which means you can dispose of assets and make a profit of up to £11,100 without paying tax. Any excess over £11,100 is taxable.
Capital gains are taxed at different rates according to your income, so from a taxation point of view it’s best to dispose of assets while you are a basic (as opposed to higher or additional) rate taxpayer, when the rate of tax of capital gains is 10% (or 18% if you dispose of residential property). If you’re a higher rate taxpayer, the rate is 20% (28% for disposals of residential property). If the gain, when added to your income, straddles the higher rate tax threshold, you’ll pay tax on some of the gain at 10% (or 18%) and the rest at 20% (or 28%).
Transferring ownership of assets to your spouse is a good way to reduce your capital gains tax bill. For example, imagine you are selling shares that will give rise to a capital gain of £20,000. Although you can use your allowance to cover the first £11,100 of the gain, the other £8,900 would be taxable at up to 20%. However, transferring half the shares to your spouse before you sell them would mean that you would each make a gain of £10,000, which is within each of your capital gains tax annual allowances of £11,100. In this case, the total tax bill would be zero.
4 Staying aware of inheritance tax
Just like capital gains tax, we each get annual allowances for inheritance tax; in this case the allowance to make gifts that fall outside our estates, even if we don’t live for seven years after making them. For example, everyone is allowed to make annual gifts up to £3,000. This allowance can be carried forward up to one year, doubling it up to £6,000 if no gifts were made in the previous tax year. Other allowances cover gifts to those getting married or entering into civil partnership, small gifts to any number of people and gifts out of normal expenditure.
5 Giving to charity/gift aid
The tax year end is also a good time to think about charitable giving. Charitable gifts reduce your tax bill in a similar way to pension contributions. Gifts made under the Gift Aid scheme qualify for immediate tax relief at 20%, with higher or additional rate taxpayers claiming back the difference via self assessment. You may be asked to give evidence of a gift when claiming back the extra 20% or 25% at the tax year end, so make sure you keep good records and get receipts.
6 Understanding the Personal Savings Allowance
In April 2016, the government introduced a new personal savings allowance. Basic rate taxpayers can now earn up to £1,000 interest on their cash savings account each tax year without having to pay tax, while higher-rate taxpayers can earn up to £500 of interest. Those in the highest tax bracket, earning over £150,000 a year, do not benefit from the allowance.
7 Keeping up with new rules on income from shares-based investments
When it comes to dividends from shares-based investments, since April 2016 everyone has a dividend allowance of £5,000. No tax is paid on this allowance.
Tax is paid on any excess dividends over and above the £5,000 allowance, with the rate depending upon whether total income falls within basic, higher or additional rate tax band. The rates currently applied to these bands are 7.5%, 32.5% and 38.1% respectively.
You might also be interested in…