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Kirk Rice Blog

Tax Planning – 2018Written on February 8, 2018 by Kirk Rice LLP

Tax Planning – 2018
Financial Services Questions

The Question:

Each year I complete my tax return and every time realise I must be able to do something to minimise my tax liability (legally!) but by then it is too late. This year I want to be more organised and would like to understand what I could be doing before the 5 April to be more tax efficient and hopefully save money. I am married, and a higher rate tax payer. 

Kirk Rice LLP answers:

The end of the tax year (at time of writing) is only 7 weeks away. This may seem a long time, but Christmas was nearly 7 weeks ago – how fast did that time fly! I have summarised points to consider below. All will take time to action and you should get specific advice before proceeding. The first message is therefore; start your end of year tax planning now, otherwise you may find that once again it is ‘too late’.

The obvious starting point is pensions as any personal contribution will benefit from tax relief.  As you are a higher rate tax payer this will be at 40%. From a practical point of view, basic rate tax relief (20%) is given at source; higher rate tax relief (additional 20%) is claimed via your tax return. The maximum you can invest is normally £40,000 or your PAYE/self employed income if lower and this is known as your annual allowance. I added ‘normally’ in the previous sentence because the annual allowance for certain higher earning (above £150,000) individuals can be reduced; potentially to £10,000. It is possible to invest more than £40,000 (but no more than your income) by carrying forward unused annual allowance from the 3 previous tax years. Carry forward and the high earner annual allowance can be quite complex, and certainly too involved to cover properly in this response. Anyone who is a higher earner and/or considering using carry forward annual allowance should therefore get specific advice.

As a priority, I would suggest you establish how much (if any) annual allowance you have available to carry forward from the 2014/15 tax year and whether you want to use it, because from the 6 April 2018 any unused annual allowance for that year will no longer be available. You must fully use the current year’s annual allowance before using any carry forward allowances. If, as an example, you have £20,000 of unused annual allowance for 2014/15 and there have been NO contributions this tax year, you would need to contribute £60,000; £40,000 for this tax year, £20,000 for the carry forward year. The actual net payment required by you would be £48,000 as £12,000 basic rate tax relief would be added to this.

Assuming you have £60,000 of income in the higher rate tax band, you can claim a tax rebate of £12,000 representing the additional 20% higher rate tax relief. In this example, it has cost you £36,000 to get £60,000 invested. This equates to a return of 66.66%! A pension payment can be especially tax efficient if you have income from £100,000 through to £123,000. Income in this band is effectively taxed at 60% because for every £2 of income over £100,000 you lose £1 of your personal allowance. A pension contribution could reduce your income below £100,000 thus restoring your personal allowance giving a tax saving in addition to the tax relief. Other points to consider in your tax planning are; using your Individual Savings Account (ISA) allowance which is currently £20,000. This can be allocated to either a cash or stocks & shares ISA (or combination of). ISAs are free of personal tax and do NOT need to be disclosed on your tax return. If you have investments that are subject to Capital Gains Tax (CGT) you could consider selling them to use this year’s CGT allowance which is £11,300. You can reinvest the proceeds, but be aware, for the tax planning to work you cannot buy back the same investment within 30 days.

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT’s) benefit from 30% income tax relief. To retain the tax relief, EIS’s must be held for a minimum of 3 years and VCT’s for 5 years. VCT’s are exempt from CGT and dividends are tax free. EIS’s can be used to defer capital gains tax realised on other investments (perhaps sale of BTL property) and they are exempt from inheritance tax after 2 years. Any growth is tax free. EIS’s and VCT’s are both complex, higher risk financial products. They can be difficult to sell/realise the capital from in future, and are generally only suitable for sophisticated and/or high net worth investors.

A PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN.YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

READ OUR FACTSHEETS

Enterprise Investment Scheme

Pension Tax Reliefs

Individual Savings Accounts

Venture Capital Trusts

End of year tax planning can be complex; if you are interested in discussing what’s best for you, please telephone Michael Powell on 01344 875000 or email info@kirkrice.co.uk.

If you would like to receive our fortnightly Money Matters & Taxing Times newsletter electronically, simply email info@kirkrice.co.uk stating ‘newsletter’, in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.

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