20th March 2015
The end of the tax year is fast approaching and individuals have just about enough time to do some last minute tax planning.
The tax year ends on 5 April and director of Leicester-based Rowley Turton said savers and investors should act quickly to ensure they make the most of their tax allowances to avoid handing money to the taxman unnecessarily.
Money held outside of a tax-free ISA should be reviewed to see if any capital gains tax (CGT) is due to be paid. Investors should consider whether they need to switch funds, encash investments or use these investment to fund ISAs, and do so while making use of their annual £11,000 CGT allowance.
‘For example if you have £50,000 of funds, and these grow by just 5% per annum this would leave you with a gain of £31,444 after ten years with basic rate taxpayers facing a potential CGT bill of £3,680 and higher rate taxpayers [facing] a CGT bill of £5,724,’ he said.
‘However, by switching funds every year – realising gains less than the annual CGT allowance – you effectively rebase the value of your investments thereby avoiding an unnecessary CGT bill when you eventually need to encash these investments.’
Any CGT allowance left unused after 5 April is lose forever so CGT needs to be reviewed now.
Everyone can save up to £15,000 each tax-free into an ISA this year, choosing whatever combination of cash and stocks and shares savings they wish.
Even though interest rates on cash ISAs are very low, Gallacher said this could still add up to a ‘considerable saving’.
‘Assuming a couple have £30,000 of savings, and both save the maximum of £15,000 into a cash ISA, even with today’s low interests such as 1.5%. Using cash ISAs would save a basic rate income tax paying couple £90 next tax year, and higher rate taxpayers would save £180,’ said Gallacher.
‘Maximising your ISA contributions over a number of years has seen some people able to accumulate over £1 million in ISAs, giving a significant annual tax saving.’
Saving into a pension has become even more attractive since the introduction of pension freedom. It is not just the ability to access a pension but also the ability to pass a pension on to loved ones, possibly tax free.
Gallacher said that for higher rate taxpayers, saving into a pension now is more important than ever as there is talk of the next government abolishing higher rate tax relief on contributions.
‘Depending on your earnings and any other pension contributions, you can contribute up to £40,000 into a pension for this tax year and also utilise any unused allowance from the previous three tax year’s…allowing maximum contributions of up to £190,000,’ he said.
Gallacher added that those aged over-55 who wish to access their pension would see their annual pension contribution allowance fall from £40,000 to £10,000.
‘If you need access to the tax free lump sum from your pension and some, but now all of the income element, you may be better taking the benefits this tax year under the existing capped drawdown rules,’ he said.
‘While this will restrict the amount of income you can draw it will retain your option of paying in up to £40,000 a year. Although you should make sure you are aware of the ‘tax free recycling rules’ before acting to ensure that you do not end up with an unwanted tax charge.’
Households with children where one parent earns £50,000 a year or more will see their child benefit cut under the child benefit tax charge rules but Gallacher recommended adjusting pension contributions to continue receiving the benefit.
By increasing pension contributions this reduces their ‘adjusted income’ to below £50,000 and should ‘restore their child benefit in full’, he said.
Soaring house prices mean more people than ever are likely to fall into an inheritance tax (IHT) tax trap but a future bill can be minimised by utilising the annual gift allowances.
‘You can give away a lump sum of up to £3,000 exempt of IHT, this is known as your ‘annual exemption’,’ said Gallacher.
‘If you have not made any gifts in the last tax year you can gift £6,000 this tax year to utilise last year’s allowance.’
‘In addition, there is a small gift exemption meaning you can make small gifts of £250 per recipient each year free of IHT. There is no restriction on the number of small gifts but they must each be to separate individuals.’
It is not just adults that receive annual allowances, children do too.
A total of £3,600 gross can be saved for a child into a pension – a total investment of £2,880 for a basic rate taxpayer each year. This can be paid by a parent or grandparent for the child’s benefit.
Those children eligible for child trust fund (CTF), their family can save £1,200 each tax year and children who are ineligible for a CTF can save £3,600 into a Junior ISA each year tax free.
Children also have their own £11,000 CGT allowance that can be utilised on any investments held for them.