How to save tax by 5 April 2016
Donald Drysdale highlights some new tax planning ideas to consider this year, alongside some old favourites.
No peace for the wicked
The tax filing season has ended, but there’s no peace for tax practitioners. The season for pre year end personal tax planning has arrived.
With all the publicity given to aggressive tax avoidance, there are those who might argue that it really is wicked to engage even in tax planning. I prefer the alternative view – that taxpayers are entitled to ensure they pay the right amount of tax.
In its wisdom Parliament has created tax legislation which gives taxpayers a large number of optional reliefs. In my view people should avail themselves of these in circumstances where they are intended to apply, and should do so with a clear conscience.
Many prudent taxpayers will seek professional advice in getting their tax right. Indeed, those who try to find their way unaided through our morass of over-complicated tax law may be at risk of paying either more tax than they need to, or insufficient tax with a consequent risk of interest and penalties.
The annual tax planning process
Tax handbooks and guides are readily available, packed with checklists of all the usual tax planning ideas to consider in the run up to 5 April, so I’ll mention only a few of them here.
Where spouses or civil partners pay income tax at different marginal rates, income tax savings may often be achieved by transferring income-generating assets between them or, in the case of owner-managed businesses, by adjusting remuneration levels.
Particular savings may arise from bringing an individual’s income below £150,000 (above which 45 per cent income tax applies), £100,000 (above which the personal allowance tapers away) or £50,000 (above which child benefit is clawed back).
Taxable income may be reduced by exchanging an amount of salary or bonus for approved share options, benefits in kind or pension contributions. Salary sacrifice arrangements can still be effective, although the government is reviewing the future of these. If you have a company car, consider whether an alternative arrangement might be more tax-efficient.
For 2015/16 the adult ISA allowance is £15,240, and the junior ISA limit for under-18s is £4,080.
Income may be sheltered from tax by investing in EIS shares, venture capital trust units or SEIS shares. In each case there are complex qualifying conditions to be met by investor and investee.
ISAs should generally be used throughout a family to shelter as much income and gains as possible. For 2015/16 the adult ISA allowance is £15,240, and the junior ISA limit for under-18s is £4,080. Outside ISAs, returns that are tax-free or taxed as capital (at 18 per cent or 28 per cent) may be preferable to income.
For capital gains tax, each individual is entitled to their annual exempt amount (£11,100 for 2015/16). Optimum use of this may be achieved by careful timing of disposals which crystallise gains and losses, making negligible value loss claims where appropriate, and in some cases transferring assets between spouses or civil partners before disposal. Care should also be taken to maximise other CGT breaks such as main residence relief and entrepreneurs’ relief.
These are all tried and tested tax saving strategies. But what about opportunities that are new this time around?
There may be scope for paying additional tax-relieved pension contributions by 5 April 2016, and it might be prudent for some taxpayers to do this before Budget Day on 16 March – although any decision needs to take into account the individual’s marginal rate of tax and their views on what the Chancellor might do. Press reports have speculated that future relief could be restricted to a flat rate of perhaps 33 per cent for everyone. There have also been more extreme suggestions of an ISA-style system where no relief would be given on contributions but the ensuing pensions would be tax-free.
Anyone considering additional contributions needs to bear in mind the imminent reduction of the lifetime allowance, as discussed in our recent article on Key facts about pension lifetime allowance changes.
A tax charge arises where contributions exceed the annual allowance. Generally this is £40,000 for 2015/16, and any unused annual allowance from the previous three tax years may also be used. For further details see HMRC guidance.
From 2016/17 onwards the annual allowance will be reduced by £1 for every £2 of income above £150,000, subject to a maximum reduction of £30,000. To facilitate this, new rules align pension input periods with tax years from April 2016. There are complex transitional rules for 2015/16 which give the potential for a total annual allowance greater than £40,000 in some circumstances, as explained in HMRC’s draft Technical Note of 8 July 2015.
For HMRC’s latest technical guidance on the annual allowance and lifetime allowance, see Pension Schemes Newsletter 75 published last week.
Stamp duty land tax
Taxpayers may wish to accelerate property acquisitions to avoid the much-publicised extra 3 per cent SDLT on second homes and buy-to-let residential properties from 1 April 2016.
This new supplement may impact unfairly on people simply moving house. Furthermore, married couples or civil partners are restricted to only one main residence between them, while an unmarried couple may have two without the extra SDLT arising. A broadly similar supplement on LBTT in Scotland will apply from the same date.
Planning ahead for 2016/17
Personal savings allowance
From 6 April 2016, a new personal savings allowance of £1,000 or £500 will be available to individual basic rate and higher rate taxpayers respectively. This will apply a nil income tax rate on up to that amount of savings income such as bank or building society interest. Additional rate taxpayers will not have a personal savings allowance.
Spouses or civil partners may be able to save income tax by redeploying savings deposits between them by early in 2016/17 to maximise the use of their personal savings allowances.
Also from 6 April 2016, a new tax-free dividend allowance of £5,000 is available to each individual taxpayer. Above that amount, dividend income will be treated as the top slice of income and taxed at 7.5 per cent, 32.5 per cent and 38.1 per cent within the basic, higher and additional rate bands respectively.
Subject to other tax and non-tax considerations, spouses or civil partners may wish to transfer shareholdings between them as necessary by early in 2016/17 to maximise the use of their dividend allowances.
The new dividend tax regime aims to discourage tax-motivated incorporation of businesses, but is likely to be bad news for anyone with high dividend income. Those who can control their flow of dividends, such as proprietors of owner-managed companies, might be able to save tax by bringing forward dividends from 2016/17 to 2015/16.