As 5th April approaches, NW Brown offers a brief guide to the allowances and exemptions you could potentially take advantage of before the end of the tax year.
An 'end of tax year' checklist
This is intended as an overview, and many of these areas can be complicated. If you feel that any of these could be relevant to you, we recommend speaking with your Wealth Manager, or alternatively call us on 01223 720208.
- The maximum tax relievable pension contributions you can personally make (the ‘annual allowance’) is the lower of your ‘relevant’ earnings (generally salary, bonuses, overtime, and commission) or £40,000.
- This reduces by £2 for every £1 of your ‘adjusted income’ exceeding £150,000, to a minimum of £10,000. Your ‘adjusted income’ is generally your relevant earnings, all other income, and all pension contributions.
- If your relevant earnings exceed £40,000, you could potentially utilise unused annual allowances from the three previous tax years, for a maximum of £160,000 (if you have the relevant earnings in this tax year to support this).
- Personal contributions receive basic tax relief of 20% at source, so if you invest £8,000 an additional £2,000 is claimed within the plan.
- If you are a higher or additional rate tax payer you can claim further relief of 20% or 25% up to the amount of such tax that you actually pay via your annual tax return.If you have no earnings at all, you may still invest up to £3,600 gross until age 75, by making a contribution of £2,880 and receiving £720 in tax relief.
- The rules surrounding the annual allowance limits and tax relief available are complicated, and your individual situation will determine what is precisely available.
Savings and Investments
- If you are 18 or above, you may invest up to £20,000 into an Individual Savings Account (ISA) each year, which can be invested in cash, or stocks and shares. 16 to 17 year olds may invest up to £20,000 in a Cash ISA only.
- If a person is under 18, they may invest in a cash or stocks and shares Junior ISA, which has an allowance £4,260 (increasing to £4,368 in 2019/20).
- Other ISAs available are Help to Buy, Lifetime, and Innovative Finance ISAs, wherein any contributions made will form a part of your overall ISA allowance of £20,000. These ISAs are more specialist, and only appropriate in specific circumstances.
For more adventurous investors there are higher risk products available to attract income tax relief, as well as advantageous Capital Gains Tax and Inheritance Tax treatment:
- An Enterprise Investment Scheme (EIS) can provide income tax relief of 30%, subject to a limit of a £1,000,000 (£300,000 tax relief);
- A Seed Enterprise Investment Scheme (SEIS) provides income tax relief of 50%, subject to a limit of £100,000 (£50,000 tax relief);
- A Venture Capital Trust (VCT) provides income tax relief of 30%, subject to a limit of £200,000 (£60,000 tax relief);
- Social Investment Tax Relief (SITR) has income tax relief of 30%, subject to a limit of £1,000,000 (£300,000 tax relief)
These are particularly complicated, and due to the high risk nature of the products (which are essentially investing in very small companies), advice is crucial.
Income Tax Considerations
Below is a brief summary of the tax bands which apply to income for 2018/19 and 2019/20:
Basic Rate Tax Band -
Higher Rate Tax Band:
Additional Rate Tax Band:
- Income within the personal allowance is tax free, however this decreases by £1 for every £2 of income above £100,000, until completely lost at £123,700 (£125,000 for 2019/20). The main income tax rates are 20% for the basic rate, 40% for higher rate and 45% for additional rate.
- You can reclaim your lost personal allowance via your tax return, by reducing your tax assessable income below these limits. This could be done, for example, by making personal pension contributions or charitable donations to registered charities.
- In recovering your personal allowance you are effectively able to get 60% tax relief, by getting 40% higher rate tax relief on a pension contribution, and recovering 20% tax from the renewed personal allowance.
- There is a tax free dividend allowance of £2,000 available, regardless of your total income. This is set to remain at this level of the 2019/20 tax year. Dividend tax rates are 7.5% in the basic rate band, 32.5% for higher rate and 38.1% for additional rate.
- There is also a savings allowance of £1,000 which applies to income from investments such as cash accounts and bonds. If you are a higher rate tax payer this reduces to £500, and once you are an additional rate tax payer this reduces to nil.
- If you are married or in a civil partnership you may transfer assets between each other tax free, which can be a useful away of distributing income producing assets. While this may not have much of an effect so late in the tax year, it is worth considering for future years.
Capital Gains Tax
- Your annual exemption for Capital Gains Tax is £11,700 of gains realised in the tax year, with the excess being taxed at 10% for basic rate tax payers, and 20% for higher and additional tax payers (increasing to 18% and 28% for gains from property). The exemption is increasing to £12,000 for 2019/20.
- Capital losses can be used to offset gains within the tax year, and if your total net position was a realised loss for the tax year you are able to offset gains for future tax years, as long as they are properly recorded within four years after the end of the relevant tax year.
- As above, if you are married or in a civil partnership you may transfer assets without tax, therefore you can take advantage of both of your annual exemptions by transferring an asset before selling.
- Certain reliefs may apply to reduce or eliminate the tax charge, depending on the asset in question and your individual circumstances. This could include, for example, main residence relief, entrepreneurs’ relief, and investors’ relief.
- Gains can also be deferred by investing within an investment product such as an EIS.
- Once again, determining the full extent to which you could use these allowances and exemptions would require advice to be sought with your wealth manager.
- There are a wide array of options available to reduce the effect of Inheritance Tax on your estate each tax year, and it is a subject which requires a great deal of attention to the individual’s circumstances to determine what is appropriate.
- Rather than list the full amount of options here, we have produced an article specifically on this area here, and we recommend speaking to your Wealth Manager if this is an area you would like to discuss further.
Tax planning is a complicated area of financial advice and it can take many tax years to implement a successful strategy. It is imperative that you receive bespoke specialist advice that is suited to your circumstances. This means that it is essential to begin the process sooner rather than later and we are happy to have a conversation to determine the appropriate course of action.
For more information please contact your Wealth Manager, or alternatively call us on 01223 720 208.
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