Insights

This is the second of our articles on tax planning. In the first we looked at what’s not advisable, bearing in mind the General Anti-Avoidance Rule (GAAR) and HM Revenue & Customs’ activities aimed at recovering unpaid taxes. There are however a number of tax planning opportunities that it is advisable to review each year and take advantage of where appropriate to your circumstances.

Top pre-April tax planning tips

Reduce income to avoid the highest level of income tax

For the year ending 5 April 2014 income tax is chargeable at the rate of 45% on income in excess of £150,000 per annum.

If your income falls within £100,001 and £118,800 you will gradually lose your personal allowance so that it is completely lost when your income exceeds £118,800. The effect of this is that income falling within that band suffers an effective rate of tax of over 55%.

If your income falls within this band, it is sensible to consider reducing it. This can be done for example by making pension contributions or charitable donations – the cost of these will be correspondingly less than they would otherwise be because you will be re-instating your personal allowance and thus reducing the rate of tax you pay.

If you are a director/ shareholder of your own company, ensure you set your remuneration levels to take this into account.

If you receive dividends, remember these are grossed up by 10% in order to arrive at your total income, and hence your rates of tax. So for example a £90 dividend will add £100 (£90/9 x 10) to your total income.

Consider investing in tax shelters before the year end

Tax shelters include:

Pension contributions

• Tax relief can be obtained on contributions of up to £3,600 for people with no earnings, or earnings of up to £3,600 per annum. Consider making contributions for non (or low) earning spouses or children;

• For those earning, contributions of an amount equal to annual relevant earnings, or £50,000 (whichever is the lesser) can be made. Consider taking advantage of this before the limit reduces to £40,000 on 6 April 2014.

Enterprise Investment Scheme (EIS)

Income tax relief at 30% is available where new shares are subscribed for. If the qualifying conditions continue to be met for a 3 year period, the growth in the shares will be free of capital gains tax. In addition, other gains can be ‘rolled over’ into an investment, thereby obtaining a tax deferral.

Seed enterprise Investment Scheme (SEIS)

Income tax relief at 50% is available on a maximum annual investment of £100,000. 50% of other gains can be exempted up to 5 April 2014.

Venture Capital Trusts (VCTs)

Income tax relief at 30% is available on a maximum investment of £200,000.

Individual Savings Accounts (ISAs)

Each individual can invest up to £11,520 in an ISA for 2013/14.  Children aged 16 or over can also invest in an ISA. Income and gains are free of income tax and capital gains tax.

National Savings Bonds

Each individual can invest up to £30,000 in total and any returns are tax free.

Use your annual capital gains tax allowance

For the year to 5 April 2014 the annual exemption per person is £10,900. This cannot be carried forward, so use it or lose it.

On the disposal of assets held in joint names of husband and wife, both will be able to claim an exemption, making gains of up to £21,800 exempt.

Use your annual inheritance tax exemption

An individual can make annual gifts of up to £3,000 tax free. If not used in the previous tax year, the exemption can be carried forward for one year only. Gifts made within the annual exemption are tax free even if the person making the gift does not survive for 7 years.

If you would like to discuss any matters relating to tax planning, please contact Lesley Stalker by emailing las@rjp.co.uk.