The period leading up to the end of the tax year on 5 April is one of the best times to review your taxes and finances. Indeed taking action prior to the end of the tax year in some cases will give even greater saving opportunities, but you need to act fast.
Our top tips for reducing your tax liability are:
Maximise Tax Free Allowances
An important element of basic income tax planning is that maximum use is made of personal reliefs and the starting and basic rate tax bands. Currently, the personal allowance cannot be transferred between spouses. However it may be possible to move assets between spouses and other family members to distribute income more evenly. In doing so both capital gains tax and inheritance tax should be considered.
Giving to charity
Charitable donations made under the Gift Aid scheme can result in significant benefits for both the donor and the charity. Currently, the charity is able to claim back 20% basic rate tax on any donations and if the donor is a higher rate taxpayer the gift will qualify for 40% tax relief. So a cash gift of £80 will generate a tax refund of £20 for the charity so that it ends up with £100 as well as the donor getting a higher rate tax relief of £20 making the net cost of the gift only £60. Always remember to keep a record of any gifts you make.
Tax relief is currently available on pension contributions at the taxpayer’s marginal rate of tax. Therefore a £100 pension contribution will only cost a higher rate taxpayer £60 and a top rate payer £55. In the current tax year, the amount of your pension savings that benefits from tax relief is limited to an annual allowance of £50,000, but from next year this reduces to £40,000. So if you have available funds it may be worth trying to maximise your allowance for this tax year and make use of any unused pension relief from the last three years.
Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. An individual aged 18 or over may invest in one cash and one stocks and shares ISA per tax year but limits apply.
A cash ISA allows you to invest up to £5,760 in the current tax year whilst a stocks and shares ISA allows you the option to invest up to £11,520. If you want to invest in both then the stocks and shares ISA investment is capped so that overall you do not exceed the £11,520 limit.
16 – 17 year olds are able not only to open an adult cash ISA but can also have a Junior ISA account. This means a combined maximum investment of £9,480 is possible for 2013/14.
There are many tax efficient investment schemes available including Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) which both allow income tax relief on new equity investment (in qualifying unquoted trading companies). For EIS that is 30% relief on investments of up to £1 million and for SEIS up to 50% relief on £100,000. CGT exemption is given on qualifying shares held for at least three years. A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. Income tax relief at 30% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.
As always we would be delighted to discuss with you the issues involved and any appropriate action you may need to take.