6 ISSUES FOR £6 Subscribe to Hertfordshire Life today click here

How to legitimately organise your financial affairs as the tax year ends

PUBLISHED: 12:18 16 February 2017 | UPDATED: 12:21 16 February 2017

Getty Images/iStockphoto

Getty Images/iStockphoto

Pogonici

Simon Lewis reminds us that the current tax year ends on 5 April and considers the opportunities for us to legitimately organise our financial affairs in order to pay a little less tax

With the end of the current tax year looming and what might prove to be a radical spring budget from the Chancellor just a few weeks away, time is running out to consider and implement last-minute tax planning opportunities.

In recent years, popular debate has muddied the waters between tax avoidance and tax evasion. Regardless of moral considerations, the former is legal and the latter is illegal. It is perfectly legitimate to organise one’s affairs in order to take advantage of tax reliefs and allowances. The precise purpose of such reliefs and allowances is for government to influence behaviour in a way that should be both beneficial for government finances and the wider economy; so it is important not to be duped by populist propaganda into paying more tax than you need to.

The fact is that the UK tax system is incredibly complicated with the result that it is seldom truly progressive and there are far too many nasty pitfalls that can unfairly penalised the unwary or inexperienced. Here are some common pitfalls and opportunities to consider.


Year end income tax planning

Personal income over £150,000 is taxed at the rate of 45%. However this is not the effective top rate of income tax. This is because the personal income tax allowance is reduced by £1 for every £2 of income over £100,000. As a consequence, the effective top rate of tax is 60% for those with an income between £100,001 and £122,000. Individuals with a level of income close to these thresholds can substantially reduce their tax liabilities by taking advantage of opportunities to reduce their taxable income below £100,000.

For some people it might be possible to defer income or change it into non-taxable forms. However, at this late stage in the tax year the most common methods are making pension contributions and/or making charitable donations under gift aid.

Another important income threshold for many is the limit that governs entitlement to child benefit. The value of child benefit is cancelled out by the tax charge if the taxable income of the highest earning parent exceeds £60,000. There is no tax charge if the highest earner has income of £50,000 or less. An individual pension contribution reduces income for this purpose, so the tax charge could be avoided. Child benefit is worth over £2,500 per annum to a family with three children. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved, can lead to and effective rate of tax relief as high as 65% fora family with three children.

For 2016/17 onwards the new dividend allowance of £5,000 means that dividends up to this amount can be received free of personal tax, no matter which tax band the dividend falls into. For those who run their own business and have control over the timing and payment of dividends, it makes sense to ensure this allowance is fully utilised. Once the allowance is used the effective tax rate for company owners (allowing also for corporation tax deducted) is excruciatingly high at 46% for higher rate taxpayers and 50.58% for additional rate taxpayers. The rate of corporation tax is reducing in 2017/18 so there might be merit in deferring larger dividends until then.

Over the years, many investors have invested money in both onshore and offshore Investment bonds. One of the attractions of such investments has been their ability to defer personal tax by taking advantage of an annual withdrawal allowance set at 5% of the original investment. However, what is deferred usually becomes payable eventually and those with large gains accrued in such arrangements could be liable to substantial income liability when they decide to cash in their investment. Top slicing relief can be used to amortise profits over a number of tax years, possibly reducing or eradicating a liability. The rules are complex so care is needed.

For experienced investors, specifically those who have experience in making investments into businesses directly, it is possible, under the seed enterprise investment scheme, to claim income tax relief on investments in start-up companies up to £100,000. Investors can claim income tax relief at 50% (whatever their highest effective tax rate), but of course the risks are high and expert advice is necessary.

It is also possible to invest in established unquoted companies (and also companies listed on AIM) through enterprise investment schemes to secure income tax relief, at a flat rate of 30%. Once again, such investments can be very risky so they are not suitable for everyone and expert advice is essential.


Year end capital gains tax planning

It is possible to realise capital gains tax-free up to the annual exemption of £11,100 for 2016/17. Married couples and civil partners can transfer assets between them without crystallising a gain and this should be considered where it is possible to use both annual exemptions.

It is also worth bearing in mind that from 2016/17, capital gains tax rates for individuals reduced (for higher rate and basic rate taxpayers) from 28% to 20% and 18% to 10% respectively. These rates are historically low and might well increase again in the future. There might therefore be merit in bringing forward crystallisation of large gains that have been accrued over time.


Year end Inheritance Tax planning

Inheritance taxis paid on the chargeable value of your estate above the nil rate band, which is currently £325,000. One of the most effective ways to reduce a prospective inheritance tax liability is to diminish your future estate by giving away money before you die. There are many methods that can be employed to achieve this although the one that is tax year sensitive is the annual gift exemption of £3,000. This is the amount that can be gifted free of inheritance taxwith immediate effect (usually there is a requirement to survive gift by 7 years). It is possible to carry forward any unused gift exemption from the previous fiscal year so time is running out to utilise any unused exemption from 2015/16.


Year end investment planning

It is possible to invest up to £15,240 in an ISA for 2016/17. The tax benefit is that any future income and gains will be free of personal tax. Whilst the tax benefit might be marginal for basic rate taxpayers it is important to bear in mind that often, the cost of investing in an ISA is no greater than holding the same investments in another way. Furthermore, a modest ongoing tax saving might become a substantial ongoing tax saving as your circumstances evolve, your money grows in value and the tax regime changes.


What to do next

Tax planning implementation can take time and time to act in the current tax year is running out. The actions referred to in this article are by no means exhaustive and you should seek advice before proceeding. We would be delighted to assist with your tax planning needs so please contact us if you would like us help you make the most of your options.


Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 47 years. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority.

Partridge Muir & Warren Limited, Aissela, 46 High St, Esher, KT10 9QY; 01372 471 550; simon.lewis@pmw.co.uk; www.pmw.co.uk

0 comments

Welcome , please leave your message below.

Optional - JPG files only
Optional - MP3 files only
Optional - 3GP, AVI, MOV, MPG or WMV files
Comments

Please log in to leave a comment and share your views with other Hertfordshire visitors.

We enable people to post comments with the aim of encouraging open debate.

Only people who register and sign up to our terms and conditions can post comments. These terms and conditions explain our house rules and legal guidelines.

Comments are not edited by Hertfordshire staff prior to publication but may be automatically filtered.

If you have a complaint about a comment please contact us by clicking on the Report This Comment button next to the comment.

Not a member yet?

Register to create your own unique Hertfordshire account for free.

Signing up is free, quick and easy and offers you the chance to add comments, personalise the site with local information picked just for you, and more.

Sign up now

More from People

Yesterday, 18:00

Kelly Saynor is the owner of Renew Medical Aesthetics in Gawsworth and a trained nurse. She lives in Bollington and this is how she likes to spend her spare time.

Read more

Two sisters from Kent are on a mission to help young people cope with physical and mental disabilities via the healing power of their equine pets

Read more

Kent Life’s chosen charity ellenor gives vital care in all settings for babies, children and adults and it’s reliant on your continuing generosity to be able to continue to help thousands of families facing terminal illness in Kent each year

Read more

A combination of the frivolous and the serious defines the work of Faversham-based children’s books illustrator Priscilla Lamont

Read more
Yesterday, 11:18

The nostalgia just keeps on coming, pop pickers, and this time we look at the music and clubs which defined an era

Read more
Yesterday, 10:53

Steve Fletcher looks back on six incredible matches that AFC Bournemouth has been involved in since they joined the Premier League in 2015

Read more
Yesterday, 10:21

There’s nothing like a brisk walk in the country air. For one Hampshire team, there really is nothing like the one they will embark on in May, a Lake District hike in aid of a charity for injured veterans. Susie Kearley reports

Read more
Yesterday, 09:54

Friends with the finest footballers on the planet, a journalist, author and presenter, Barcelona-born Guillem Balague these days calls Hitchin home. At the Biggleswade club he is passionate about, Layth Yousif spoke to the engaging expert about his surprising career

Read more
March 2017
Yesterday, 09:44

Brighton children’s author Liz Pichon’s Tom Gates series is a publishing phenomenon – published in 43 languages, it has sold around four million copies worldwide. This year’s World Book Day illustrator tells Jenny Mark-Bell that Tom is set to become a star of the small screen

Read more
Yesterday, 09:35

A sickly vicar’s son from Bishop’s Stortford went on to be one of the most influential and controversial figures of the Victorian age. With the 115th anniversary of Cecil Rhodes’ death this month, Stephen Roberts looks at his remarkable life

Read more
March 2017

Topics of Interest

Food and Drink Directory


Job search in your local area




Local Business Directory

Hertfordshire's trusted business finder

Search For a Car In Your Area

Property Search