With tax increases the prospect for the foreseeable future, it is essential that you make the most of every available tax relief. Using the tax breaks available to you also makes good financial sense.
Different ideas will suit different people. If you would like to discuss any of these opportunities, we can recommend solutions that are tailored to you. We’ve provided some examples of the ways in which legitimate planning could save you money by reducing a potential tax bill in the run up to the tax year end on 5 April 2014.
Investing in a pension is one of the most tax-efficient ways to save for your retirement. From 6 April 2014, the pension lifetime allowance (LTA) is being reduced from £1.5m to £1.25m which could radically affect your retirement strategy. The LTA is important because it sets the maximum amount of pension you can build up over your life and benefit from tax relief.
If you build up pension savings worth more than the LTA, you’ll pay a tax charge on the excess, potentially at 55%. However, some affected individuals could elect for ‘Fixed Protection 2014′ before 6 April 2014, and the £1.5m limit can be preserved. From 6 April 2014 (until 5 April 2017), individuals will also have a fall-back option of electing for ‘Individual Protection 2014′ to preserve their individual LTA at the lower end of £1.5m, the actual value of their pension fund at 5 April 2014 or the standard LTA (i.e. £1.25m in 2014/15).
If the total of all your pension funds is likely to be at or near £1.25m by the time you retire, you should quickly seek professional advice on whether opting for Fixed Protection 2014 and/or Individual Protection 2014 is appropriate.
The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £50,000, within pension input periods (PIPs) ending before 6 April 2014, and you receive tax relief for the contributions at your highest marginal tax rate. But from 6 April 2014, the maximum reduces to £40,000.
If you have not made contributions up to the limit in 2010/11, 2011/12 and 2012/13, then the unused relief may be available for carry forward into 2013/14. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief, and any contributions made in the year reduce the amount available to bring forward.
A pension contribution paid before 6 April 2014 also reduces both your tax bill for 2013/14 and, if appropriate, your payments on account for next year.
Tax relief is available even for non-taxpayers, so you can invest in a pension for a non-earning spouse. Non-earners can contribute £3,600 per tax year (the Government will automatically pay £720 in tax relief, reducing the amount you pay to just £2,880).
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Individual Savings Accounts (ISAs)
Make sure that you use your 2013/14 ISA allowance to shelter your savings from tax. There is no capital gains tax or further income tax to pay on investments held in an ISA, making them one of the most tax-efficient ways to invest.
In the current tax year you are permitted to invest up to £11,520 into a Stocks & Shares, or alternatively you can invest up to £5,760 in a Cash ISA and the remaining amount in a Stocks & Shares ISA. In the new tax year (6 April 2014 – 5 April 2015), the limit rises to £11,880, meaning in the next few months a couple could shelter £46,800 from tax using both years’ allowances.
Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £3,720 a year, tax-efficiently, for their children or grandchildren.
The value of investments and income from them may go down. You may not get back the original amount invested.
If appropriate, consider making individual gifts of up to £3,000, which you can do each year free from Inheritance Tax (IHT). You could also use any unused allowance from the previous year, meaning a couple can give away up to £12,000 now and a further £6,000 on 6 April, potentially saving £7,200 of IHT (charged at 40%).
Have you made a Will? A good Will should minimise tax and give your family flexibility and protection. Dying without one means your assets will be distributed to your family without reference to your wishes using the intestacy laws, potentially after IHT at 40% is paid.
If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the ‘Nil Rate Band’) to charity could save your family IHT.
In many family circumstances, the use of a formal trust can help you protect and enhance your family’s future finances. The timing of creating a trust may have significant tax implications so, if you have long-term financial goals, the sooner you seek expert advice on your options the better.
Inheritance Tax Planning, Will Writing and Trust Advice are not regulated by the Financial Conduct Authority (FCA).
Everyone has a capital gains tax (CGT) free allowance of £10,900 in the current tax year. If you haven’t realised gains of this amount, take a look at whether assets can be sold before 6 April 2014. If you have used up your allowance, consider deferring selling assets until the next tax year or transferring them to a partner. If your spouse either pays no tax or at a lower rate, you could reduce the tax bill substantially.
Bed & ISA is one effective way to use your CGT allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution, you can harvest gains, sheltering future growth from tax.
You can increase your CGT annual allowance by registering any investment losses on your tax return. Once they have been registered, you can use them to offset gains made in the future, effectively increasing your CGT allowance.
If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a return of capital taxed at a maximum of only 28%, rather than income taxable at a maximum of 45%.
Tax advice is not regulated by the Financial Conduct Authority (FCA).
Tax-paying, sophisticated investors who are prepared to take higher risks in return for the potential for higher rewards should be aware that attractive income tax reliefs are available. If you are a tax payer, you will receive a tax rebate of up to 30% (subject to your total income tax bill) when investing in a Venture Capital Trust (VCT). Enterprise Investment Schemes (EIS) income tax relief of 30% – up to a maximum of £300,000 reclaimed tax in any year. Seed Enterprise Investment Scheme (SEIS) income tax relief of 50% for subscriptions for shares of up to £100,000, irrespective of the investor’s marginal tax rate.
The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards. Investment in smaller company funds can involve greater risk than is customarily associated with funds investing in larger, more established companies. Above average price movements can be expected and the value of these funds may change suddenly.