17 Mar 2017
The end of the tax year for individuals will soon be here, on Wednesday, April 5
Every year UK taxpayers give away several billion pounds unnecessarily, and the last year is expected to be no different.
The Unbiased financial planning website has calculated the 2016 figure is expected to be around £4.6billion.
Unbiased said the most common areas where we tend to waste tax include: savings; retirement planning; Inheritance Tax; Capital Gains Tax; and by not seeking professional help.
Effective tax planning is about knowing the personal and business taxes you are liable to pay and acting to legally minimise them.
It is also about maximising your net income and creating opportunities to invest and save tax-efficiently for the current and future needs of your business, your family and yourself.
While there is no doubt that the tax system is complex, you should not let complexity deter you from a simple goal: keeping your taxes as low as possible.
Here are some key areas to be considered.
Aim to ensure each spouse uses their full personal allowance for Income Tax purposes where possible. Annual income of less than currently £11,000 is not liable to tax. Spouses and registered civil partners should consider the possible transfer of income-producing assets to ensure that personal allowances are not wasted.
Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £122,000 or above. If appropriate to your particular situation, making charitable donations that qualify for Gift Aid could reduce total income. In addition, annual gross personal pension contributions may be deducted from total annual-earned income for the calculation of adjusted income, and certain other investment structures may qualify for significant tax rebates which could be used to offset the reduction. Also, moving investments that generate income from taxed to tax-efficient environments could also reduce an individual’s ‘net adjusted annual income’.
If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free personal allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to state retirement pension and other benefits is protected. Obtaining professional advice from a qualified accountant is important prior to taking any action due to the ‘wholly and exclusively’ rule.
Minor children are entitled to personal allowances. There are restrictions on the amount of income that a child can derive from a parent, but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions, and national minimum wage issues, are taken into account. Obtaining professional advice from a qualified accountant is important prior to taking any action due to the ‘wholly and exclusively’ rule.
Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880.
The annual allowance for making tax-relievable pension contributions is £40,000, so consideration should be made to utilising the full annual allowance for 2016-17 by April 5, 2017. It is possible to carry forward unused annual allowances from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions in excess of £40,000 with a little planning.
We will be publishing a second article on 2016-17 year-end tax planning next week, looking at other areas including tax-relievable pensions for high earners, the pension lifetime allowance, tax-favourable investments, timing of income, company dividends, Capital Gains Tax and Inheritance Tax.
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