With the tax year end fast approaching, it’s always a good time to assess if you should be looking to utilise some of the very valuable allowances that are available, which often work on a “use it or lose it” basis. We always try to encourage our clients where possible, to use these allowances earlier in the tax year. However, this isn’t always possible, as many clients will only receive a bonus from work in the later part of the tax year. The other area where we have been encouraging clients to wait until later in the tax year is pensions.
Despite there being talk each year about the Government removing higher (and additional rate) tax relief, nothing has happened to date. This is seen as a way to save tax and potentially focus some of these savings on increasing tax relief for basic rate tax payers, where it is perceived there may be more of a need for help.
However, from the start of the 2016/17 tax year, a Tapered Annual Allowance was introduced that reduces the annual amount that can be paid into pensions from £40,000 as standard to as low as £10,000 for individuals with earnings at £210,000 and above. This has the impact of saving the Government tax, so partly achieves their objectives, however, it does tend to make matters fairly complex. This tapering starts once earnings are above £150,000 and there are reasonably complicated rules around this, which will not be covered in this blog.
Suffice to say, it is an area that needs careful consideration and individuals impacted will likely need professional advice to ensure they do not inadvertently exceed their allowance and incur punitive tax charges.
As many people might earn a bonus towards the end of the tax year, which may vary greatly year on year, it can be difficult to know in advance, how and to what extent your annual pension allowance will be impacted. It can therefore often make sense to limit any contributions to £10,000 until income is known later in the tax year. A proper assessment of what available allowance you have can then be made.
Unlike many allowances, there is the ability to carry forward unused allowances from the previous 3 tax years. You must have used all of the current year’s allowance first and then you can make use of the allowance from the earliest year. So, for the current tax year, you can go back as far as the 2015/16 tax year. Therefore, this will be the last opportunity to utilise unused allowance from 2015/16. Also, for anyone that has been impacted by the Tapered Annual Allowance since 6th April 2016, this could well be the last opportunity to utilise a full annual allowance from the 2015/16 year.
Pensions can be a very effective way to plan around tax, in particular, if your total earnings for the tax year are to fall between £100,000 and £123,700. You will effectively be paying tax of 60% on this band of earnings, due to the loss of your personal allowance. If your earnings were £110,000 for example and you pay a gross pension contribution of £10,000, it will have the effect of reducing your income back down to £100,000 and the net cost of the contribution would be £4,000.
There are similar opportunities to reduce your income if you are caught by the loss of Child Benefit, with earnings between £50,000 and £60,000. This would allow you to get 40% tax relief and reclaim some or all of the Child Benefit.
Individual Savings Accounts (ISAs)
The current ISA contribution limit is £20,000, which will remain the same for 2019/20. Maximising your ISA contributions remains important if you are a higher or additional rate taxpayer or pay capital gains tax (CGT), even though some of the recent savings and dividend tax changes may have cut some of your investment tax bill:
• All income within ISAs is free of personal UK tax and does not count towards the dividend allowance or personal savings allowances.
• An ISA and all its tax benefits can effectively be inherited by a surviving spouse or civil partner.
• Gains made within ISAs are free of CGT.
• There is nothing to enter on your tax return.
CGT annual exemption
Investors will generally have seen reasonable gains over the past decade. If you have profits from your investments, as a broad rule you should consider whether it’s worth realising some of your gains to use your annual CGT exemption. In 2018/19, you can realise gains of up to £11,700 without any liability to tax – a potential tax saving of up to £2,340 (£3,276 for residential property which doesn’t benefit from another tax relief such as principal private residence relief). Crystallising gains could provide you with cash to make a pension or ISA contribution.
Inheritance tax (IHT)
The main IHT nil rate band of £325,000 has been frozen since 6 April 2009 and will remain so until April 2021 – making it all the more important to use your annual inheritance tax exemptions. These include the £3,000 annual exemption, both for 2018/19 and any unused amount from 2017/18, and also the often-forgotten normal expenditure out of income exemption.
Get in touch with us if you have any questions on any of the areas covered in this blog.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.