As another tax year draws to a close, now is a good time to take stock and consider whether all allowances and reliefs have been maximised as far as possible and whether any action needs to be taken pre 6 April 2020.
Below are our top ten tips to consider in advance of the new tax year.
1. As the personal allowance is reduced by £1 for every £2 of net income over £100,000, those with income of between £100,000 and £125,000 could end up paying tax at an effective rate of 60%. If your income is close to the threshold it may be worth considering ways to reduce your taxable income. This could be achieved by making pension contributions, charitable donations, deferring income into 2020/21 or transferring income producing assets to your spouse.
2. Taxable income exceeding £50,000 for the year could lead to a claw back of child benefit under the high income child benefit charge. Once taxable income reaches £60,000 the benefit will be lost in full. Reducing, deferring or transferring taxable income as described above could help to preserve this benefit.
3. Up to £1,250 of your personal allowance can be transferred to a spouse or civil partner if neither of you are higher rate taxpayers by virtue of the marriage allowance. This is of benefit where one spouse has income of less than the personal allowance (£12,500 for 2019/20), with a tax saving of up to £250 per annum.
4. The residence nil rate band (RNRB) is an additional inheritance tax nil rate band which is available on death when a residence is passed to a direct descendent. The RNRB increases by £25,000 to £175,000 from April 2020. This effectively raises the inheritance tax threshold to £1million for a couple. However, for estates valued over £2 million the RNRB element is tapered away. We would recommend a review of your Will to ensure this, and any other tax reliefs, will be available, as well as considering any planning to reduce your estate where appropriate.
5. With 100% of mortgage interest relief for landlords restricted to the basic rate of tax from April 2020, you could end up with a higher tax bill than expected. There are several ways to minimise the impact of the new rules including incorporation, spousal transfers, use of partnerships etc.
6. If possible, you should make full use of your ISA allowance, which is £20,000 for the 2019/20 tax year and up to £4,368 in a junior ISA for children under 18. Although the investment itself doesn’t attract any tax relief, any income generated from it will be tax free.
7. If you have any surplus cash, you could look to make a tax efficient investment. There are various options which typically offer income tax relief at 30% (but can be as high as 50%) and with tax free capital gains on disposal. It may also be possible to carry back an investment made in 2019/20 to 2018/19 to accelerate tax relief.
8. Owner managed businesses should review their remuneration package in advance of the new tax year and look to utilise their tax bands as far as possible. A combination of low salary, high interest and dividends could result in tax free income of up to £20,500 (and double that for couples) in 2019/20 if structured appropriately and depending on the individual’s circumstances.
9. The Capital Gains Tax annual exemption for all individuals for 2019/20 is £12,000, which you should try and use, if possible. Consideration should be given to the transfer of assets between spouses such that both utilise their annual exemptions on a subsequent disposal or deferral into 2020/21 where the allowance has already been used.
10. Consider utilising your pensions allowance, which enables you to contribute up to £40,000 for 2019/20, plus any unused allowance for the previous three tax years. Note, however, that if your adjusted income is more than £150,000, the allowance reduces by £1 for every £2 above this threshold down to a limit of £10,000.
If you would like to find out more, please get in touch with your usual tax contact or call 01242 237661.