With three weeks left until the tax year end, it’s time to review your finances and check whether there are any actions you can take to make your current and future tax position as efficient as possible. As every year the key date is 5 April, and as always we provide a tax year end planning checklist to guide you through the main optimisation opportunities, which you can find below.
Income Tax and National Insurance
If you have some control over the size and timing of your income, e.g. you are self-employed or own a company, there may be opportunities to optimise your income tax and NI bill, such as delaying an invoice or finding the right combination of salary and dividends.
The main income tax and NI figures for 2016-17 are as follows:
- £5,824 (£112 per week, same as previous year) = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
- £8,060 (£155 per week, also unchanged) = Primary Threshold for employee’s NI (12%)
- £8,112 (£156 per week, also unchanged) = Secondary Threshold for employer’s NI (13.8%)
- £11,000 = Personal Allowance – basic rate income tax (20%) applies above this amount
- £32,001 = higher rate income tax (40%) kicks in
All the various rates, thresholds and allowances for this and the next tax year are available on this page on gov.uk.
If you have the option, make sure you use your tax-free dividend allowance, which is £5,000 for both 2016-17 and 2017-18 (it will go down to £2,000 in 2018-19, as Chancellor Philip Hammond revealed in his last week’s Budget speech).
Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1%, respectively, for basic, higher and additional rate taxpayers. The taxable amount includes dividends you receive from your own company, as well as any other investments you directly hold, such as shares or funds. It excludes dividends received within tax wrappers such as your pension or ISAs – powerful tax planning tools which certainly deserve your attention before tax year end.
The annual pension contribution allowance remains the same as last year at £40,000 for most taxpayers, but for high earners it is tapered at a rate of £1 for every £2 you earn above £150,000, up to £210,000 (as a result, above £210,000 the pension allowance is fixed at £10,000). HMRC provides official guidance here.
Keep in mind that you can also use any unused allowances from the three previous tax years, as long as your total contributions stay below your earned income for the current year. You should also keep an eye on the Lifetime Allowance (LTA), currently at £1 million.
5 April 2017 also marks the deadline for Individual Protection 2014, which allows you to get a higher personalised LTA as a compensation for the April 2014 LTA reduction (LTA was cut from £1.5m to £1.25 in April 2014 and further to £1m in 2016). We have covered this in detail last month.
Besides pensions, ISAs are some of the most effective ways to save for retirement and the trend in the recent years has been towards higher allowances and more flexible rules. The range of products and investment options available under the ISA scheme has been expanding. You can invest in the traditional cash ISAs, stocks and shares ISAs and the recently introduced innovative finance ISAs.
The annual ISA allowance for 2016-17 is £15,240 (it will go up to £20,000 next year). Unlike in the past, if you have made any withdrawals during the year, it is now allowed to put money back in without reducing your allowance (provider and product specific rules may also apply).
In any case, the deposit must be made by 5 April, otherwise this year’s allowance is lost. Note that some ISA providers can take several working days to process deposits – make sure to send the final deposit at least a week before the tax year end to avoid disappointment.
Capital Gains Tax
Outside an ISA or pension, capital gains tax (CGT) normally applies when you sell an investment at a profit, with the rates being 18% and 28%, respectively, for basic and higher rate taxpayers. There is an annual CGT allowance, making the first £11,100 of capital gains tax-free. Like the dividend allowance or the ISA allowance, it is use it or lose it, and can’t be transferred to following years.
If you are holding investments with unrealised capital gains, you may want to sell and reinvest part of them in order to use the CGT allowance and reduce the tax bill in future years. You can also reinvest the proceeds in an ISA (a “Bed and ISA” transaction), which effectively earns your investments a tax-free status going forward. Of course, transaction costs apply and may outweigh the tax benefit. Taxes are only one of the many things to consider when deciding your investment strategy and actions.
Inheritance Tax and Gifts
If you have a large estate and inheritance tax (IHT) is a concern, you should also consider maximising your annual allowance for tax-free gifts (called the annual exemption). You can give up to £3,000 a year to your beneficiaries and, if you continue to live for at least seven years, the gift is out of your estate and free of IHT.
More Information and Help
Tax planning is obviously a very complex area and the above are just the main points which apply to most taxpayers. Depending on your circumstances, there may be other opportunities available to you. If you need more information concerning the above listed issues or need help with your particular situation, please do not hesitate to contact us.