Posted by Nick Day on 03 Mar 2016
Year End Personal Tax Planning Tips
The last day of the 2015-16 UK tax year (5 April 2016) is fast approaching and the UK Budget is taking place on 16 March 2016. Therefore, it is time to consider ways to reduce unnecessary UK tax liabilities by carrying out year end UK personal tax planning reviews with some tax planning tips.
There are big changes afoot for the 2016/17 tax year including new rules for taxing company dividends, more restrictions on pension tax planning and the introduction of negative tax rules for buy-to-let landlords.
Issues for Personal Tax Planning
Issues to consider include but are not limited to:
- Ensuring each spouse uses their full Personal Allowance for income tax purposes where possible. Annual income of less than currently £10,600 is not liable to tax. Spouses/civil partners should consider the possible transfer of income producing assets to ensure that Personal Allowances are not wasted.
- 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.
- 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.
- 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 (AA) for making tax-relievable pension contributions is £40,000, so consideration should be made to utilising the full AA for 2015-16 by 5 April 2016. It is also possible to carry forward unused AAs from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions well in excess of £40,000 with a little planning. There are also some transitional rules abolishing pension input periods that may make it possible for you to receive an enhanced AA for 2015-16. The AA for “high earners” (the definition is complicated but broadly, those with an annual “adjusted income” of more than £150,000) will be reduced to as little as £10,000 for 2016-17 so it is key for those individuals who will be impacted to consider 2015-16 planning before 5 April 2016 and potentially before 16 March, the date of the Budget, which could alter the landscape still further.
- The pension Life Time Allowance (LTA – the total amount of UK pension savings each individual is allowed to build up in their lifetime) is currently £1.25M although this will be reduced to £1M from 6 April 2016 onwards. It is possible to protect your LTA at the higher level under certain circumstances if you apply formally to do so. You should seek detailed tax/financial advice if you believe you might benefit from such an application.
- The “flexible draw down” pension rules now in place from 6 April 2015 onwards allow individuals the opportunity to plan their affairs to manage the level of the money they take from their pension pot to both minimise annual income tax liabilities and keep within the LTA. A review of what you could draw down as income from your pension funds before 6 April 2016 could prove worthwhile.
- The use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS), and Venture Capital Trusts (VCT) should be reviewed. Up to £15,240 per person (so up to £30,480 for a married couple) can be invested in an ISA for the 2015-16 year.
- Timing of income – taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income, employment bonuses etc., and also to the timing of the payment of dividends paid out by family owned companies.
- In particular, company dividends are currently treated as the top slice of an individual’s income. They are grossed up by 10% and the gross amount is taxed at effective rates of 0% in the basic rate band, 25% in the higher rate band and 30.6% in the additional rate band. From 6 April 2016, company dividends will still be treated as the top slice of income, but will no longer be grossed up, and will be taxed at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band. However, the first £5,000 of dividends will be tax-free to the recipient, no matter which tax band they fall in. For more details please click here to read our article on this subject. Investors and those with family owned businesses should urgently review their affairs to check the impact of the new rules and consider whether dividends can be accelerated to before 6 April 2016 or deferred until after 5 April 2016 to save tax.
- These changes to the taxation of dividend income from 6 April 2016 have made the Government concerned that individuals may structure their affairs to enjoy lower capital gains tax rates so that they receive a capital rather than an income distribution from winding up their companies. Rules to counter this are to be introduced from 6 April 2016 so if you are considering taking action on this front you should take immediate action/advice.
- Taxable income of between £100,000 and £121,200 is effectively taxed at a rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £121,200. Deferral of income may therefore save tax at the rate of 60% although planning might also include the use of additional pension contributions, charitable donations, etc. Entitlement to Child Benefit payments could also be protected/reinstated using year end personal tax planning.
- Capital gains tax – consideration should be given to utilising the tax-free Annual Exemption (currently £11,100). Each spouse/civil partner is entitled to the exemption each year so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash-flow benefits in terms of when tax needs to be paid. “Bed and breakfasting” to increase the base acquisition costs of shares is no longer tax-effective where shares are sold and re-purchased shortly afterwards (unless you are non-resident, when the rules do not apply), but planning with spouses/civil partners buying back the shares may still be tax-effective. Click here for more on Capital Gains Tax planning.
- Inheritance Tax – the use/carry forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income, and tax-free gifts in consideration of marriage, which can range between £1,000 and £5,000 depending on the relationship with the person getting married. Click here for more on Inheritance Tax planning.
- If you are considering acquiring a property such as a “buy to let” property or a holiday home and you already own at least one residential property you will from 1 April 2016 face higher Stamp Duty Land Tax (SDLT) rates of an additional 3% on top of the normal rates.
- For buy-to let landlords, the 10% “wear & tear” allowance for furnished properties is abolished from 6 April 2016. From this date a deduction will only be allowed as furniture, etc. is replaced. Therefore, for those considering replacing white goods and furnishings, it could be beneficial to wait until after 5 April 2016 to incur the expenditure. Another major change is that from 6 April 2017 relief for loan interest on buy-to-let residential properties will start to be restricted so that by the 2020-21 tax year, interest relief will only be available at the basic rate of income tax.
- Expatriates – there are always as number of factors for “expats” to consider whether they are non-domiciled individuals (“non-doms”) living/working in the UK or Brits leaving the UK and seeking to establish non-residence status. You can click here for more detailed information on our services for Expatriates – and here for more detail on changes to the rules and year end planning
If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or email@example.com.
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- Top 10 Expat Tax Tips for Individuals Moving to the UK
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- Non-Resident Landlords – UK Tax Update
- UK Self Assessment Tax Return Filing and Penalties