Check your PAYE code
You should check that you are on the correct code. Don’t just assume that if tax is being deducted at source it must be right. If you have been paying too much tax, you can claim back the excess for up to six previous years. If you have been paying too little, the Revenue can claim it back.
Make full use of your personal allowances
We all have a personal allowance, currently £6,475 (under 65) a year, which is the amount you are allowed to earn before you start paying tax. If appropriate, couples should consider maximising their personal allowances by channelling savings and investments towards the person who pays the least amount of tax.
Consider carrying out a salary sacrifice
Salary sacrifice means giving up the right to part of your salary in exchange for a benefit, such as an employer pension contribution. Both you and your employer will save money on National Insurance and the employer also saves on Corporation Tax.
Make the most of tax relief at your highest marginal rate on pension contributions
You should make the most of tax relief at your highest marginal rate on pension contributions. This tax break is particularly valuable if you are a higher rate taxpayer and so potentially receive relief at 40 per cent (2009/10) on your pension contributions that fall within the higher rate band.
Bring forward dividend payouts to this tax year
If you are a high earner and work for a family company or have your own company, you may wish to consider bringing forward income distribution from future years to this tax year. If you pay yourself a dividend this year, and assuming you are a higher rate taxpayer, you would currently be paying an effective rate of 25 per cent on dividends. But from the next tax year you would, as a top rate taxpayer, be paying an effective rate of 36.1 per cent on your dividends.
Make sure you receive your age allowance if you are over 65
Make sure you receive your age allowance if you are over 65. This allowance is currently worth £3,015 on top of the normal personal allowance for those aged 65 to 74 and £3,165 for those over 75, taking their total personal allowance to £9,490 and £9,640 respectively. Those entitled to it should make sure they claim it, as it is sometimes not included automatically in an individual’s tax coding.
Bring forward income
Shareholders in their own businesses who take money as dividends will be taxed at 32.5 per cent until 5 April, rising to 42.5 per cent the following day. On £10,000-worth of dividends, you could save £1,000 in tax by bringing the payment forward. Bear in mind, though, that you would also have to pay the tax via your self-assessment form a year earlier.
Share incentive schemes
High earners could ask their employer to set up a share incentive scheme ahead of the changes so that, instead of taking cash bonuses, they would receive shares in the firm. This converts income taxed at up to 40 per cent today into gains taxed at the flat rate of Capital Gains Tax (CGT) of 18 per cent.
Review family trusts
It may be worth drawing income arising in a family trust. This is taxed at 20 per cent on up to £1,000 and 40 per cent thereafter, rising to 50 per cent from 6 April 2010. However, this will depend on the type of income, as dividends would be taxed at either 10 per cent (if within the £1,000 band) or 32.5 per cent (42.5 per cent from 6 April 2010).
Even trusts with a small amount of income will be subject to tax at 50 per cent. Alternatively, beneficiaries could draw the income if their other earnings are below £150,000 – beneficiaries of a discretionary trust have no entitlement to income. The trustees could choose to distribute the income but it would have to come with a 40 per cent (50 per cent from 6 April 2010) tax credit. The increase in tax rate will only affect ‘non-Income In Procession’ trusts which pay RAT (‘Rate Applicable to Trusts’).
Crystallise pension benefits
People in their early fifties who want to retire early or release tax-free cash from their pensions may wish to consider doing so before 5 April, when the minimum retirement age goes up from 50 to 55. However, there are many instances where it is not advisable to take the cash. For example, if your pension has a guaranteed annuity rate, you may be better off using your entire fund to buy an annuity. If you are in a final-salary scheme you could choose to take extra tax-free cash and a reduced pension, although take care as the income you would give up is guaranteed, is inflation-proofed and has a widow’s or widower’s benefit. However, in other cases it may be worth crystallising benefits. Equally, it may be worthwhile if you want to free up cash to make gifts for Inheritance Tax planning or make other tax-efficient investments.
Review holiday lets
If you let property short-term, this is the final tax year in which you can offset expenses against income,
so get any work done on the property before
6 April 2010. It must be let for at least 70 days a year, excluding lets exceeding 31 days, and be available for rental for at least 140 days. If you are the owner of such a property you have until 5 April 2010 to take advantage of the current furnished holiday lettings tax reliefs. These include flexibility with using income losses, additional capital allowances, certain capital gains reliefs and relevant UK earnings treatment for pension purposes.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.