12 strategies to keep your tax liability to a legal minimum
The run-up to the tax year end on 5 April 2015 is the perfect time to consider tax planning opportunities and to put in place strategies to minimise tax throughout 2015/16.
Good planning and careful timing are critical if you want to maximise tax reliefs or minimise the tax bill on a transaction or investment, and to avoid falling foul of the system of penalties and interest levied by HM Revenue & Customs (HMRC). With some prior preparation, you could arrange your financial affairs to minimise the impact of tax on you, your family and your business.
In this article, all references to married couples include registered civil partners.
1 Make sure your tax code is correct
Check your tax code each year (the numbers and letters on your payslip). Don’t assume that HMRC know what they are doing. Check the basics: are your name, address and National Insurance number right? The notice will also state your employer’s name; if you no longer work for that employer, something is wrong.
Check the letter at the front of your tax code. For example, L is used for anyone getting the basic personal allowance; P is used for those aged between 65 and 74 getting the full personal allowance; Y for those 75 or over getting the full personal allowance; V is used for those aged between 65 and 74, eligible for the full personal allowance and the married couple’s allowance who just pay basic-rate tax; K means you get no tax-free pay or owe money to HMRC.
The numbers on your tax code are worked out as follows. Firstly, your tax allowances, any income you’ve not paid tax on – part-time earnings or untaxed interest – and any taxable employment benefits are added up. This figure is then taken away from the tax allowance and divided by 10. This is added to the relevant letter and becomes your tax code. If you’re on the wrong code, you may be paying too much tax.
2 Take advantage of the New Individual Savings Account (NISA) allowance
Make sure that you fully use your tax-efficient NISA allowance. From 1 July 2014, the annual limit increased to £15,000 (with effect from 6 April 2015, this will increase to £15,240). This can all be allocated to a Cash NISA or a Stocks & Shares NISA, or alternatively split between both cash and stocks and shares. This means married couples, for example, could put up to £30,000 between them into NISAs this tax year (before 5 April), and a further £30,480 from 6 April.
Interest received on cash savings or gains from NISA investments are tax-free. Higher-rate taxpayers don’t have to pay any further tax on dividends from investments either, and you don’t have to declare NISAs on your tax return. Also, there is no capital gains tax to pay when you sell shares or units held in a NISA.
3 Junior NISAs provide good long-term savings
Consider using Junior NISAs (the replacement for Child Trust Funds) as a good long-term savings option for a child’s future and to avoid being taxed on gifts you make to them. In the tax year 2014/15, the Junior NISA allowance is £4,000, and this will increase to £4,080 in April 2015.
4 Save tax with pension contributions
Take advantage of tax reliefs and (tax-deductible) employer contributions to build a fund for your retirement. Personal contributions to pension schemes attract tax relief at your highest rate, making them an ideal tax-efficient investment vehicle.
For pension contributions to be applied against your 2014/15 income, you must pay on or before 5 April 2015. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but also subject to the annual allowance. The basic annual allowance cap on pension savings is £40,000 for 2014/15.
5 Transferring assets could offer tax benefits
If you are married and do not own assets in some form of joint ownership, it may be advantageous for tax purposes for transfers to be made to ensure joint ownership. Consider transferring savings and investments to your spouse if they pay a lower rate of tax than you do. Complex rules apply, but if appropriate to your particular situation, it could provide benefits for income tax, capital gains tax and even inheritance tax. Transfers should be outright and unconditional.
6 Age-related allowance eligibility
If you were born before 6 April 1948, check if you are eligible for an increased personal allowance. Not all income is taxed, which means you might pay a lower income tax rate. For 2014/15, the age-related personal allowance is £10,500, and £10,660 if you were born before 6 April 1938. As time passes, the additional age-related allowance will disappear as it is overtaken by increases in the standard personal allowance.
7 It’s good to give
The Gift Aid scheme is for gifts of money to charities by individuals who pay UK tax. Charities can reclaim tax on any donations made by individuals, whether large or small, regular or one-off – provided the conditions for the tax relief are satisfied.
Gift Aid donations are regarded as having basic-rate tax (20%) deducted by the donor. If you are over 65, making donations to a charity through Gift Aid could reduce your taxable income to below the threshold at which you start to lose out on age-related allowances. If you are in a higher tax bracket, you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
8 Fully utilise your capital gains tax allowance
Capital gains tax is a tax on the profit when you sell or ‘dispose of’ something, an ‘asset’ that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. For individuals, capital gains in 2014/15 under £11,000 are tax-free. Married couples who own assets jointly can claim a double allowance of £22,000.
Capital gains tax is charged at 18% on your total taxable income and gains (up to £31,865) if you are a standard-rate taxpayer, and 28% if you pay tax at a higher rate (from £31,866).
9 Inheritance tax matters
You need to check if you have a potential inheritance tax liability. Each individual has a current tax-free allowance of £325,000, known as the ‘nil-rate band’. Inheritance tax only applies to the value of your estate above this at a rate of 40% on death. However, transfers between married couples are exempt from inheritance tax, or the seven years prior to death, and if the nil-rate band is not used on the first death. This means that the value of your estate on the second death that will be exempt from inheritance tax doubles up to £650,000.
Lifetime gifts are not normally counted as part of your estate for inheritance tax purposes if you live for a further seven years after making them. Lifetime transfers are either exempt, potentially exempt, or chargeable lifetime transfers.
10 Effective trusts
Trusts can provide a way of reducing inheritance tax liabilities, not just for the donor but also for the donee. The rules are complex, but significant tax savings could be achieved with careful planning and receiving professional advice. In particular, trusts can be an effective way of using important reliefs on businesses and agricultural properties.
11 Where there’s a Will, there’s a way
If you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen. You should write a Will and keep it up to date to reflect changes in the family situation. In particular, Wills need to be reviewed and amended as necessary on marriage or on divorce. The precise position depends on whether English or Scottish law applies.
12 Removing value from an estate
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of paying inheritance tax liabilities. A policy written under an appropriate trust can be arranged to cover an inheritance tax liability due on death. It is particularly useful in providing funds to meet an inheritance tax liability where the assets are not easily realised.