TT218: Tax planning opportunities

Having recently suffered the pain of paying your personal tax bill, what action can be taken now to legitimately minimise your liability for the year to 5 April 2015?

If January wasn’t gloomy enough, with short days and icy mornings, it also brought the payment of personal tax liabilities. At that stage it is too late to do anything to reduce the bill. Any tax planning needs to be done upfront, before the end of the tax year. Now is the ideal time to consider any action that you should take to minimise tax for the year to 5 April 2015.

Firstly it is important to understand the rates of tax applicable to various levels of income. It is often stated that the top rate of income tax in the UK is 45%, this is not true. The table below summarises the tax rates for 2014/15:

Personal allowance 0%0 – £10,000
Basic rate 20%£10,001 – £41,865
Higher rate 40%£41,865 – £150,000
Additional rate 45%above £150,000

However due to the loss of the personal allowance if your income exceeds £100,000, there is an effective rate of income tax of 60% on income between £100,000 – £120,000. If possible you should take action to prevent your top slice of income falling within this band.

Here are a few ideas you should consider:

Pension contributions

Pension contributions are a good tool to reduce income tax liabilities. Currently contributions, up to the annual allowance, qualify for tax relief at your marginal rate of tax, which could be 45% or even 60%. The relief is obtained by extending your basic rate band, and higher rate band by the amount of the contribution. If your total taxable income is £115k a pension contribution of £15,000 will reduce the rate of tax on the top £15,000 of income from 60% to 40%.

The annual allowance for 2014/15 is £40,000 (2013/14 – £50,000) but it is possible to carry forward unused allowance from the previous 3 years.

Consideration should also be given to making pension contributions for non-working spouses, in order to equalise income in retirement. It is not unusual to find a situation where one spouse is receiving pension income taxed at higher rates while the spouse is not even using up their personal allowance. It is too late to tax plan in retirement.

Whether higher rate tax relief on pension contributions will continue after the election in May remains to be seen. However the new pension rules due to come in from April 2015, allowing flexible drawdown after age 55, make investing in pensions an attractive tax planning tool for 2014/15.

If you are considering making substantial contributions in the current tax year you should seek advice from your IFA immediately.

Transferring income to spouse

It may be possible for investment income to be taxed at a lower rate in your spouse’s hands. However to achieve this the income generating asset must be transferred to the spouse. This could apply to rental properties, share portfolios or simply deposit accounts.

Charitable donations

Charitable donations qualify for tax relief at your marginal rate of tax by extending the income bands in much the same way as pension contributions. This can be a useful tool to avoid income falling into higher tax bands.

NISA’s (New ISA’s)

From 1 July 2014 the annual limit for contributions into a NISA has increased to £15,000 and this can be invested into a cash or shares NISA. Don’t forget about junior NISAs which have an annual limit of £4,000.

Business tax planning

A lot of companies have March or April year ends so it is worth briefly mentioning some of the key considerations that should be made at a the corporate level.

  • Annual Investment allowance (AIA)
    Purchases of qualifying plant and machinery currently receive a 100% tax deduction in the year of purchase up to an annual limit of £500,000. Therefore if the company is considering a major capital outlay it would be beneficial to accelerate this into the current accounting year.The limit for AIAs will reduce from the current limit of £500,000 to just £25,000 from 1 January 2016 so this should be reviewed again towards the end of the year.
  • Provisions
    Consideration should be given to creating justifiable provisions within the company’s accounts.Many companies lease their business premises. In this case it is perfectly reasonable to create a dilapidation provision to cover the cost of returning the property to its original state of repair at the end of the lease.

There are various complex tax planning arrangements available on the market which Barnes Roffe LLP would be happy to explore with you. I haven’t discussed these above, instead focusing on good, basic tax planning ideas that we should all consider before 5 April creeps up on us.

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