Married couples* should use both personal allowances and basic rate bands
For the year ending 5 April 2014 all individuals with income of £100,000 or less are entitled to a personal allowance of at least £9,440. Married couples should make use of both spouse’s allowances. If one spouse has not used their allowance but the other has, the couple should consider transferring income-earning assets to the spouse with the lower income.
The same idea applies to the basic rate band, which for the year ending 5 April 2014 is £32,010. So again make sure that, where possible, both spouse’s basic rate bands are used before either spouse starts paying tax at the higher rate of 40%.
Clearly there are other issues to consider, not least anti-avoidance legislation, but this type of planning is absolutely legitimate and over several years can save a married couple a significant amount of tax.
If your taxable income is over £100,000 minimise your exposure to the 45% tax rate and loss of personal allowance
If your income is between £100,000 and £118,880 your effective tax rate might be as high as 60% because of the restriction in your personal allowance.
Planning could include:
- Reducing your taxable income by making pension contributions or gift aid payments to charity.
- Defer income such as dividends from 2013/14 to 2014/15 or accelerate expenditure such as buying capital equipment from 2014/15 to 2013/14 (but see below regarding to change in the rate of the annual investment allowance). You need to consider the impact on future tax bills and be aware of the anti-avoidance legislation.
- When looking at investments, think about maximising capital growth which will be taxed at the maximum CGT rate of 28%.
Use your CGT annual allowance
For the year ending on 5 April 2014 all individuals have a CGT annual exemption of £10,900 so you should try and use it, if possible. Consider bed and breakfasting into your ISA to utilise your annual exemption.
Make tax free investments
Consider utilising your annual ISA allowance, which is £11,520 for 2013/14 (see above for one idea).
If you have a child under 18 who does not have a child trust fund you could invest up to £3,720 in a Junior ISA.
Plan for your retirement
In the last few years there have been many changes made to pension tax relief and more changes were made from 6 April 2012. You should speak to us or your financial adviser to ensure you understand the changes and maximise your benefits.
Some of the key changes are:
- In April 2011 the maximum annual pension contribution (annual allowance) reduced to £50,000, although generally any unused allowance from one year can be carried forward for three years. This means that any unused allowance for 2009/10 will not be able to be used beyond 5 April 2013. The annual limit is due to be reduced to £40,000 from 6 April 2014, making it more important than previously not to miss out now.
- From April 2012 the lifetime allowance reduced from £1.8 million to £1.5 million and will reduce to £1.25m from April 2014. HM Revenue & Customs have announced that it is possible to remain exempt from this reduction in the Lifetime Allowance and still benefit from the £1.5m limit in the future. An individual can remain exempt if they adopt what is known as “Fixed Protection”. To apply for Fixed Protection and ensure that the Lifetime Allowance stays at £1.5m, an individual must complete a form and submit it to HMRC by 5 April 2014.
- State pension age is increasing, so you need to consider if/how this affects your retirement planning.
Make use of your Inheritance Tax exemptions
Take advantage of the annual gift exemption of £3,000 where possible. If you have not made use of the exemption in one year, it can be carried forward and used the next year. The exemption can be offset against a larger gift, or used to cover several smaller gifts. Certain other small gifts, some gifts on the occasion of marriage and gifts to charitable and political organisations are also exempt.
If you regularly have excess income each year another useful exemption is “normal expenditure out of income” which has no limit.
Consider investing in Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes
Venture Capital Trusts (VCTs) are a method of reducing an individual’s tax liability. The individual subscribes for ordinary shares in a VCT and obtains tax relief at a rate of 30% up to a maximum annual investment of £200,000. Furthermore, as long as the shares are held for at least five years, then the disposal will be exempt from capital gains tax. If the shares are sold within five years then the income tax relief is clawed back and the shares are chargeable to capital gains tax. Dividends on shares held within the VCT are also exempt from income tax. You do need to bear in mind though this would be an investment into a company and as a result there is an investment risk to weigh up against the possible tax savings.
Investments in Enterprise Investment Schemes (EIS) are similar to VCTs except that the investment is shares in a single qualifying unquoted trading company. Individuals obtain tax relief at a rate of 30% up to a maximum investment of £1,000,000 (or the tax liability of the year if lower). In order to be exempt from capital gains tax, the shares must be held for at least three years, otherwise the disposal will be chargeable and the income tax relief will be clawed back. Again, the investment is into a company, and there is an investment risk to weigh up.
The Seed Enterprise Investment Scheme (SEIS) is a tax advantaged venture capital scheme similar to EIS. It is designed to incentivise investment in small, early stage companies, broadly those with 25 or less employees and assets up to £200,000. The maximum investment is £100,000 in the tax year and applies to shares purchased between 6 April 2012 and 5 April 2017. The rate of income tax relief is 50%. There is also reinvestment relief against capital gains made in 2012/13 and 2013/14. This reinvestment relief is dependant on the income tax relief being available on the SEIS shares acquired and can be withdrawn if the income tax relief is later withdrawn. Again, the investment is into a company, and there is an investment risk to weigh up.
Child benefit will be restricted where one individual in a household has an income over £50,000. Where possible, income should be equalised between husband and wife and ‘partners’ to ensure that the child benefit restriction is minimised.
* references to married couples and spouses applies equally to civil partnerships and civil partners.