Think Tank

Tax year end 5 April 2020: 10 tax tips from the experts

We may be nearing the end of the tax year but there’s still time to look at whether you’ve maximised your tax efficiency and used all your allowances for the year. Here’s ten key tax tips to consider:

5th March 2020


#1 Making personal pension contributions

Personal pension contributions are net of basic rate tax at 20%.  If you’re a higher or additional rate taxpayer, you can claim further tax relief through your tax return, so that you pay less tax at the higher rates and you reduce the effective cost of the contribution.

This can be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance, if your total income exceeds £100,000.

This is a very complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief. We highly recommend you seek advice before making a contribution.

The amount you can contribute is partly linked to the amount of earned income you have in a tax year, usually from employment, self-employment, or profits from qualifying Furnished Holiday Lettings.  However, if you don’t have income from any of these sources, you’re still entitled to make a contribution to a pension scheme of £2,880. You will also receive tax relief by the pension provider topping this up with £720 from HMRC, to give a total amount invested of £3,600 gross.

This can be an effective means of building up pension savings for children and grandchildren, as contributions can be made by a third party on behalf of another individual.

As we approach the first budget after leaving the EU there have been rumours of cuts to pension tax relief. You can find out more in our article Budget pension relief cut rumours.

 


#2 Making use of an Individual Savings Account (ISA) allowances for you and your family

ISAs are a great tax efficient investment, as income arising from investments within an ISA is tax free, as is the capital growth, so no exposure to Income Tax or CGT.

The annual limit for ISA investments is currently £20,000 in total for an adult and £4,260 for Junior ISAs for a child under the age of 18.


#3 Maximise your available Income Tax allowances

If you’re domiciled and resident in the UK you’re entitled to a tax-free personal allowance for the year of £12,500, below which, no income tax liability arises. If total taxable income exceeds £100,000, this personal allowance is reduced.

You’re also entitled to a tax-free dividend allowance of £2,000, and a tax-free savings allowance for interest income of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Could you reorganise some of your income sources to make full use of these allowances?


#4 Transfer income producing assets between you and your spouse

If income is unbalanced in favour of you or your spouse, for example, one of you is a higher-rate taxpayer and the other is a basic-rate taxpayer, the other may not be making full use of their allowances.

There could be an opportunity to adjust the ownership of assets between you to balance the income position and maybe get you both down to the basic-rate tax band.

Transfers between spouses aren’t generally chargeable events for Capital Gains Tax (CGT) or Inheritance Tax (IHT) purposes. However, if you’re transferring a property you’ll need to make sure there aren’t any unintended consequences, for example, affecting Stamp Duty Land Tax and availability of CGT reliefs.


#5 Claim the Marriage Allowance

The Marriage Allowance is available if you and your spouse were born after 6 April 1935 and are both basic-rate taxpayers.

If you or your spouse aren’t fully utilising your tax-free personal allowances (including the dividend and savings allowances mentioned above), you can claim Marriage Allowance to transfer 10% of your personal allowance to your spouse (or vice versa). You can also backdate the claim to previous years.

For more details click here.


#6 Defer your income into the following tax year

This is a useful tip if you’re able to control the timings of income that you’re due to receive. For example, company bonuses, company dividends or the encashment of an investment bond or life policy.

If you expect your income to be lower in the 2020/21 tax year and you can make use of a lower rate of tax or you want to ensure your income stays within the £100,000 limit (when the personal allowance starts to be restricted), it may be beneficial to consider deferring income into the following tax year.


#7 Making gift aid donations

If you’re a higher or additional rate taxpayer, making a gift of cash to a UK registered charity (and ensuring you tick the gift aid declaration) can reduce your tax liability. You then effectively only pay 20% tax on income up to the gross value of the donation, rather than at the higher rate you would normally pay. This can also be an effective way to reduce your taxable income for the calculation of your entitlement to the tax-free personal allowance, if your total income exceeds £100,000.

You can actually make your gift aid donation after the end of the tax year and claim to carry it back to the 2019/20 year, as long as the donation is made before you submit your tax return for 2019/20 and the claim is included on your original return (you can’t claim this on an amended tax return).


#8 Utilising the Capital Gains Tax Annual Exemption

Every individual is entitled to an Annual Exemption from CGT, with total gains below that limit (£12,000 for 2019/20) having no charge to CGT.

This is a ‘use it or lose it’ relief, so if it isn’t used it is lost and can’t be carried forward to the following year.

Perhaps you could dispose of assets you are holding onto at a gain so you can utilise your annual exemption?

As with looking at transferring income producing assets between spouses to benefit from lower rates of Income Tax, the same can be true for CGT. If an asset is transferred between spouses prior to a sale, you could make use of a further annual exempt amount, and perhaps lower rates of CGT depending upon their level of income.


#9 Deferring Capital Gains into the following tax year

Capital Gain is treated as falling into the tax year in which the disposal takes place and there can be more control over when an asset is sold.

If you’ve already made disposals of assets in the current tax year, utilising your Annual Exempt amount for the year, you may want to delay further disposals until the next tax year (from 6 April 2020), when a new allowance, likely to be higher, will be available.

It’s worth noting that for sales of shares and investments, the date of sale for CGT purposes will be the trade or bargain date, rather than the settlement date. For land and property sales, this is based on the contract date, rather than the date of completion, if different.

 


#10 Utilising annual gift exemptions for IHT

Another ‘annual exempt’ amount available for every individual, is one in respect of IHT.

Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for Inheritance Tax.  This means that if the donor survives for seven years from the date of the gift, it will become exempt from IHT.  However, if they pass away before seven years has passed, the amount of the gift will still be included in their estate in calculating the IHT due.

There are a number of potential exemptions available, but the standard annual exempt amount is £3,000.  If total gifts within a tax year are less than this, the gifts will be immediately exempt and the seven-year survivorship rule does not apply.

It’s possible to carry forward an unused annual gift exemption for one year if it hasn’t already been used.  So, if you didn’t make any gifts in the 2018/19 tax year, you could potentially make gifts of up to £6,000 before 5 April 2020 with immediate exemption from IHT.

Do note that you’re regarded as using your current year allowance first, before any unused brought forward allowance. So, if you didn’t make any gifts in the 2018/19 tax year and you make gifts of £3,000 in the 2019/20 tax year, you’ll have used your 2019/20 allowance and there’ll be nothing to carry forward to the new tax year.

If you’d like to know more about how you can maximise your tax efficiency before the 5 April 2020, please get in touch.