With the 5 April tax year end approaching now is a good time to review your personal finances and the planning opportunities that are available to help minimise your tax liabilities.
Anyone who runs their business through a limited company is able to extract the first £5,000 of dividend income tax free, irrespective of what non-dividend income you have. The dividend allowance is going to be reduced to £2,000 from 6 April 2018 so don’t waste this opportunity.
Pensions remain one of the most tax efficient ways to save. You will receive a 20% top-up from the government on any contributions you make as well as extending your basic rate band for income tax purposes. Depending on your income this can reduce the amount of tax you pay at higher rates.
For anyone with an income of up to £150,000 the annual allowance for the 2017/18 is £40,000 (from all sources). This means you can contribute 100% of your relevant earnings up to the £40,000 limit should cash flow allow. For incomes over £150,000 the annual allowance is reduced on a sliding scale until the lower limit of £10,000. Under certain conditions it is also possible to carry forward unused allowance from previous tax years.
If you run an owner-managed company it is worth noting the company can make contributions on your behalf. This can potentially be done by way of salary sacrifice thereby reducing income tax, NIC and corporation tax liabilities.
Finally, remember that even if you have no income you can still contribute £3,600 into a pension. This is a useful tool for parents or grandparents wishing to pass down wealth to their children or grandchildren.
Have you used up your full ISA allowance? For 2017/18 you can invest up to £20,000 by way of cash or stocks and shares.
Junior ISAs are available to anyone under 18 and the savings limit for 2017/18 is £4,128. Anyone can contribute which again makes them tax efficient ways for parents and grandparents to invest in a child’s future.
The Lifetime ISA (LISA) was introduced this year. It offers a flexible way to save for your first home or retirement. You must be aged 18 or over but under 40 to open a LISA and you can pay into it until you are 50. You can save up to a maximum of £4,000 per tax year to which the government will add a 25% top up.
Other Tax Efficient Investments
There are a number of other tax efficient investments we can assist you with including Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT). These schemes encourage investment in relatively new companies. Given the increased risk of loss involved, HMRC incentivises this type of philanthropy by returning 30% of investments to you by way of income tax credit. For further information about these and other tax efficient investments please get in touch.
Capital Gains Tax
The CGT allowance for 2017/18 is £11,300 per person and you should plan any disposals to make use of this exemption and perhaps reinvest in a tax efficient investment such as an ISA. If you have used your allowance you could consider transferring assets to a spouse or deferring disposals until after 5 April.
Inheritance Tax Opportunities
Other opportunities to pass wealth down the generations include a £3,000 exempt gift allowance per year. If you have not already used your 2016/17 allowance you could pass £6,000 down a generation or two.
Each tax year you can also give away up to £1,000 (£5,000 for a child or £2,500 for a grandchild or great grandchild) per person as a wedding or civil ceremony present.
You can make normal gifts out of income (provided you can maintain your living standard) or gifts of any amount to charities and political parties. You can also make as many gifts of up to £250 per person as you want during the year as long as you haven’t used another exemption on the same person.
We regularly provide succession planning and inheritance tax reports to help our clients identify opportunities for passing down wealth.
Capital Allowances – Annual Investment Allowances.
The current annual investment allowance for a business is £200,000. There are also a number of energy efficient investments that attract 100% first year allowances over and above the annual investment allowances. Please check with us what qualifies for these enhanced capital allowances before making your investment.
We try to be proactive with our clients where we identify tax efficient opportunities. However please do get in touch with one of our partners or independent financial advisers if you would like to know more.
The reader should understand that if you invest in stocks and shares your investment can go down as well as up. This article does not constitute financial advice and before acting upon it, the reader should take the appropriate financial advice.
Richard J Ayre