The period leading up to the end of the tax year on 5 April is one of the best times to review your taxes and finances. There are simple, sensible steps that can be taken which can reduce your tax liabilities and help you make the most of your money. As always we would be delighted to discuss with you the issues involved and any appropriate action you may need to take. BUT DO NOT DELAY! As 5 April falls on Easter Sunday this year you should aim to have everything in place by Thursday 2nd April at the latest.
Making the most of your Personal Allowances
Each spouse is taxed separately, and so it is an important element of basic income tax planning that maximum use is made of personal reliefs and the starting and basic rate tax bands.
Currently, a transfer of just £1,000 of savings income from a higher rate (40%) taxpaying spouse to one with income below the personal allowance of £10,000 (£10,600) may save up to £400 a year. For those paying the additional rate of tax of 45%, which applies to those with taxable income above £150,000, the saving may be £450 a year.
Historically, it has not been possible to transfer the personal allowance between spouses. However, in a change to the rules a transfer of up to £1,060 of the personal allowance is possible for 2015/16 where neither spouse pays tax at above the basic rate.
Income from spouse jointly owned assets is generally shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset. The exception is dividend income from jointly owned shares in ‘close’ companies which is split according to the actual ownership of the shares.
If you are self-employed or run a family company, consider employing your spouse or taking them into partnership as a way of redistributing income. This could be just as relevant for a property investment business producing rental income as for a trade or profession.
Care must be taken because HMRC may look at such situations to ensure that they are commercially justified. If a spouse is employed by the family business, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum Wage rules may also impact.
If you are in receipt of Child Benefit and either you or your live-in partner has an income above £50,000, then it is possible that you may have to pay back some or all of the benefit through the High Income Child Benefit Charge. If you think this may affect you please contact us as it might be possible to reduce the impact of this charge. This could be achieved by reducing your income for this purpose. Methods include making additional pension contributions or charitable donations or reviewing how profits are shared and extracted from the family business.
Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has suffered a tax deduction at source a repayment claim should be made. In the case of bank or building society interest, a declaration can be made by non-taxpayers to enable interest to be paid gross.
Giving to charity
Charitable donations made under the Gift Aid scheme can result in significant benefits for both the donor and the charity. Currently, the charity is able to claim back 20% basic rate tax on any donations and if the donor is a higher rate taxpayer the gift will qualify for 40% tax relief. Therefore a cash gift of £80 will generate a tax refund of £20 for the charity so that it ends up with £100. The donor will get higher rate tax relief of £20 so that the net cost of the gift is only £60. Where the 45% additional rate of tax applies, the net cost of the gift in this example would be only £55 for an individual liable at this rate. Tax relief against 2014/15 income is possible for charitable donations made between 6 April 2015 and 31 January 2016 providing the payment is made before filing the 2014/15 tax return.
So always remember to keep a record of any gifts you make.
If the payment of bonuses to directors or dividends to shareholders is under consideration, give careful thought as to whether payment should be made before or after the end of the tax year. The date of payment will affect the date tax is due and possibly the rate at which it is payable.
Remember that any bonuses must generally be provided for in the accounts and actually be paid within nine months of the company’s year end to ensure tax relief for the company in that period.
Careful planning before 5 April 2015 may be particularly useful for individuals with high incomes. The effect of deferring payments may save paying the High Income Child Benefit Charge for those with incomes in excess of £50,000, personal allowance for those with an income in excess of £100,000 and 45% tax for those with an income in excess of £150,000.
Alternatively, consider the payment of an employer’s pension contribution by the company. This is generally tax and National Insurance contribution free for the employee. Furthermore, the company should obtain tax relief on the contribution.
Annual Investment Allowance (AIA)
Currently the AIA gives a 100% write off on most types of plant and machinery costs, but not cars, of up to £500,000 per annum from April 2014 (1 April for companies 6 April for unincorporated businesses). The AIA is due to revert back to £25,000 from 1 January 2016. Special rules apply to accounting periods straddling April 2014 and January 2016 when the amounts of available AIA changes.
Any costs over the AIA will attract an annual ongoing allowance of 8% or 18% depending upon the type of asset.
Clearly where full relief is not obtained in the initial period there will be further tax relief in subsequent years but maximising tax relief early has an important impact on tax cash flow.
Please contact us for further advice if you have any plans for new plant and machinery purchases. The timing and method of such acquisitions may be critical in securing the maximum 100% entitlement available.
In addition to the AIA all businesses are eligible for a 100% allowance, often referred to as an enhanced capital allowance, on certain energy efficient plant and low emission cars.
Employee Tax Codes
Ensuring the right amount of tax is taken relies on a PAYE code, issued by HMRC and is based on information given in a previous self assessment return or supplied by the employer. The employee, not the employer, is responsible for the accuracy of the code.
Code numbers try to reflect both your tax allowances and reliefs and also any tax you may owe on employment benefits. For many employees matters are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 1000L (1060L) and the right amount of tax should be paid under PAYE. For those who are provided with employment benefits or have more than one job and/or receive pension income, the code number is generally adjusted to collect the tax due, so that there are no nasty underpayment surprises.
HMRC may also try to collect tax on untaxed income or tax owing from an earlier year. The code may even try to allow for higher or additional rate tax that has to be paid on investment income. With so many complications and some guess work involved, getting the code exactly right can be difficult and the right amount of tax will not always be deducted.
If you are unsure about your code and are anxious not to end the tax year under or overpaid, then you should have it checked. Please talk to us.
Cars and Fuel
Employer provided car benefits are calculated by reference to the CO2 emissions and the car’s list price. The level of business mileage is not relevant. The greener the car, the lower the percentage charge. Percentage charges are increasing year on year, and for 2014/15 range from 0% to 35% of the list price of the car.
Check your position to confirm that an employer provided car is still a worthwhile benefit. It may be better to receive a tax free mileage allowance of up to 45p per mile for business travel in your own vehicle. If an employer provided car is still preferred, consider the acquisition of a lower CO2 emission vehicle on replacement to minimise the tax cost.
Capital Gains Tax (CGT)
The first £11,000 (£11,100) of gains is CGT free being covered by the annual exemption. You cannot carry this allowance forward to future years so it is important to make the most of it.
- Consider selling assets standing at a gain before the end of the tax year to use the annual exemption.
- Each spouse has their own annual exemption, as indeed do children. A transfer of assets between husband and wife may enable them to utilise their annual exemptions.
- A capital loss can be claimed on an asset that is virtually worthless. Where the asset is of ‘negligible value’ by 5 April 2015 the capital loss can be used in 2014/15.
- Unused losses can be carried forward by up to 4 years to offset against your gains.
If you do have to pay CGT, the tax rate will be either 18% or 28% depending on your level of income.
No CGT planning should be undertaken in isolation. Other tax and non-tax factors may be relevant, particularly inheritance tax, in relation to capital assets.
Utilise your maximum pension contributions and attract income tax relief.
The rules currently include a single lifetime limit on the amount of pension saving that can benefit from tax relief. From 6 April 2014 this limit is set as £1.25 million as well as an annual limit of £40,000 on the maximum level of pension contributions. The annual limit includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual limit are taxable on the individual.
Basic tax relief is available on contributions that come out of your savings or post-tax income, adding to your pension pot. If you are a higher rate taxpayer, you will receive higher rate tax relief. And for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 45%.
We would be happy to advise you on your pensions position and the new pension freedoms that are coming into force on 6 April 2015.
Individual Savings Accounts (ISAs)
ISAs provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for each tax year, therefore to take advantage of the limits available for 2014/15 the investment(s) must be made by 5 April 2015. An individual aged 18 or over may invest in one cash and one stocks and shares ISA per tax year but limits apply.
From 1 July 2014 ISAs were reformed into a simpler product, the New Individual Savings Accounts (NISA) and all ISAs become NISAs. Savers are able to subscribe the full amount into a cash NISA if they choose to. They are also be able to transfer amounts between stocks and shares NISAs and cash NISAs.
The total annual subscription limit for ISAs for 2014/15 was originally set at £11,880 of which up to £5,940 could be placed in a cash ISA. This limit applied to investments made between 6 April and 30 June 2014. From 1 July 2014 a NISA allows you to invest up to £15,000 (£15,240) in a tax year. Individuals who have already invested £11,880 can therefore top up to £15,000 by 5 April 2015.
Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes.
Throughout this article the term spouse includes a registered civil partner. We have included the relevant amounts for 2014/15 and where the 2015/16 figures are available these are shown in brackets.
Disclaimer – for information of users: This article is for information only. It provides only an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this guide can be accepted by the authors or Greaves West & Ayre.