End of Year Tax Planning
We are fast approaching the end of the current tax year (5 April 2010) and now is an ideal time to review your financial affairs to ensure that they are as tax efficient as possible. This is particularly important as the new tax year (2010/11) will see already announced tax and NIC increases and possibly a change in Government, which could bring in yet more changes.
Below, I have set out some planning points to consider and I am happy to provide further details by telephone. Any action you do take needs, as always, to take into account the wider effects of the planning as well as any tax advantage gained.
Tax increases and restricted allowances
As you are probably aware, the top rate of income tax will rise to 50% from 6 April 2010. This only applies to individuals with taxable income in excess of £150,000 and the new high charge only affects income over that level. Therefore for many the relevant highest tax rate will remain at 40%.
The tax-free personal allowance stays at £6,475 for 2010/11 and so, unusually, is not going to be increased for the new tax year. Furthermore, for those with income over £100,000 the personal allowance will taper away and an individual with an income above £112,950 will receive no personal allowance at all. Due to the interaction of the thresholds and tax rates, the marginal rate of tax will be as high as 60% for those affected. Therefore, it is important to consider how you currently receive income and whether there are any better methods that would work for you. You may also want to consider accelerating income into this tax year before the tax rises occur. We can discuss this further if that would be of help to you.
Married couples and civil partners
Married couples and civil partners have a few additional planning opportunities. Where possible, you should ensure that you both utilise your personal allowances and tax bands. With the advent of the 50% tax charge and the restricted personal allowance it is worth reviewing the balance of your joint income to see if any tax savings are possible.
Where you have made capital disposals in the current tax year you should also try to ensure that both of your capital gains tax annual exemptions are used effectively (£10,100 each for 2009/10).
If you intend to make capital disposals in the near future it is worth considering whether to spread these over two tax years to make sure that your capital gains tax annual exemption is fully used up against any gains.
The current rate of capital gains tax is 18% (or even 10% if specific reliefs are available). Even though it did not happen as predicted in the recent Budget there has been talk that the rate of capital gains tax may increase to lessen the gap between it and the top rate of income tax. However, there are currently no firm plans being proposed for this to happen. If you are likely to make a significant capital gain in the near future do let me know so I can provide further details on various options that could help reduce your tax bill.
Gift aid donations should be made by the spouse or civil partner who is the highest rate taxpayer as they are able to obtain higher rate tax relief for the payments. Basic rate taxpayers just receive basic rate relief.
It is possible to make contributions to a personal pension and contribute up to £3,600 per year (gross), without any evidence of earnings. This could therefore be useful for a non-working spouse, children or for someone with only unearned income.
There are also important pension contribution changes coming in from April 2011, which will restrict higher rate relief for some, but are also already taking some effect. Now is an ideal time to review your overall pension strategy.
Investments in venture capital trusts (VCTs) or the enterprise investment scheme (EIS) can be useful tax planning tools where they are appropriate for your investment strategy. Where qualifying investments are made, you can obtain generous tax relief. However, these are high-risk investments and, as with any form of investment, financial planning advice should be sought from a qualified individual before making any decisions.
The inheritance tax (IHT) annual exemption is £3,000 and can be carried forward for one year. Therefore, if you have not made any gifts in the past two tax years you will have an exempt amount of £6,000.
In addition, there are some other useful IHT exemptions to remember, such as the small gifts exemption of £250 to each individual and gifts out of surplus income, which, if they qualify as such, are free from IHT. Where outright gifts are made and the donor survives seven years, the gift would not be subject to IHT in any event.