The start of the New Year is rapidly approaching and for many this is a time to start setting financial goals. But before you contemplate the important factors in achieving your financial success, follow our New Year wealth check and start by making sure you keep your tax bills to a minimum and protect your wealth from increasing taxation.
Arrange your finances tax-efficiently
We all pay tax on our own individual earnings and assets. By taking advantage of a number of reliefs and allowances offered to married couples and civil partners, it is possible to reduce the total amount of tax you pay as a couple if you arrange your finances correctly.
Consider switching income-producing assets, such as shares, investment funds, bank and building society accounts and jointly owned property, into the name of the partner who pays the lower rate of tax. This way, you pay less tax on dividends, rent and savings interest. The general rule that jointly owned income is taxed 50/50 can be altered by making a specific election where there has been a genuine outright gift of assets. If you are unmarried and transferring assets, you should be aware this could potentially trigger a capital gains tax (CGT) bill.
Take advantage of jointly owned assets
For assets likely to trigger a capital gain (such as a property or shares), it may be worth owning them jointly. Much will depend on how much annual income they generate, when you are likely to sell them and the size of the potential gain.
Basic-rate taxpayers pay CGT at 18 per cent, rather than the higher 28 per cent rate. But couples need to be careful. When calculating CGT, the gain realised is added to the income earned in that tax year; if these two combined push you into the higher tax bracket you will pay the 28 per cent rate on the gain. People realising assets, such as a second home, are usually better off jointly owning the asset to take advantage of two CGT allowances, as in practice either partner, regardless of earnings, often pays the higher CGT rate.
Check you’re paying the right amount of tax
It’s important to know how to check you’re paying the right amount of tax, especially following the announcement that HMRC’s computers have led to thousands of people paying the wrong tax through their tax code. Even if you are not one of the six million taxpayers who received a letter saying tax has been over or underpaid, it’s still important to check your code.
If you are over 65, you should check that you are receiving the appropriate higher personal allowances. Those aged 65-74 can earn £9,490 before tax is charged, rising to £9,640 for those 75 and over. If you’re married and aged 75 and over, you are also entitled to the £6,965 Married Couple’s Allowance. The standard personal allowance is currently £6,475.
Plan to reduce a future Inheritance Tax bill
There are a number of exemptions allowing you to reduce a future Inheritance Tax (IHT) bill. Everyone has an annual gift exemption worth £3,000, which removes this money from your estate regardless of how long you live (if this is not used in the previous year you can carry it forward to the next, so effectively you could gift £6,000). In addition, grandparents can give £2,500 to each grandchild who marries; parents can give £5,000. Taxpayers can also make regular gifts out of income, which will be IHT-free. These can be paid monthly, annually or even termly. With other gifts, people have to survive the transfer by seven years for it to be disregarded for IHT purposes.
Claim for the extra costs involved in running your business
If you are self-employed you can claim for the extra costs involved in running your business from home. This includes lighting, heating, council tax, property insurance, repairs and even mortgage interest. These costs can be offset against profits, reducing your overall tax bill. You should be aware that if a part of your property, even a single room, is devoted entirely to your business then there maybe a CGT charge when the property is sold, so this needs to be considered before a claim is made.
Make tax and National
Insurance savings on valuable lifestyle benefits
Salary sacrifice is a contractual arrangement whereby an employee gives up the right to receive part of their cash remuneration, usually in return for their employer’s agreement to provide some form of non-cash benefit. It’s possible to give up part of your salary and in return receive non-taxable benefits, such as childcare vouchers, reducing your (and your employer’s) tax and National Insurance bills. Salary sacrifice schemes prove very popular with employees, enabling them to make tax and National Insurance savings on valuable lifestyle benefits.
Completing your financial wealth check
Finally, make sure that you fully maximise your ISA (Individual Savings Account) and pension contributions, which can be extremely tax-efficient. You can shelter up to £10,200 in an ISA – of which half can be in cash. This means a couple could effectively currently invest £20,400 this financial year, on which they pay virtually no tax on income or growth.
The government has announced that from April 2011 the annual pension allowance for tax-privileged contributions will be reduced from its current level of £255,000 to £50,000.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
