With the end of the 2019/20 tax year (5th April 2020) fast approaching, now is a good time to review your tax affairs to make the most of all tax allowances and exemptions.
With that in mind, here are six important considerations that can help improve your financial position and keep tax bills to a minimum:
1. Ensure you pay tax at an appropriate rate
A good starting point with tax planning is to calculate where your total income falls relative to the various tax bands and rates which apply. There are several tax traps where you can be stung with very high marginal rates of tax, here are some of the top tax traps to be aware of:
- While Child Benefit is not taxable, a high-income charge applies where a recipient or their partner has adjusted net income in excess of £50,000. ‘Adjusted net income’ means total taxable income after deducting reliefs (including personal pension contributions and Gift Aid donations) but before deducting allowances. HMRC will require you to pay back 1% of your family’s Child Benefit for every extra £100 you earn over £50,000 each year. Where the income is £60,000 or more, all the Child Benefit must be paid back.
- Most individuals are entitled to a personal allowance but when your net relevant earnings exceed £100,000, income can be subject to an effective 60% tax rate due to the phased removal of the personal allowance.
- Where your total income is in excess of £150,000, you pay tax at the rate of 45% in England Wales and Northern Ireland and 46% in Scotland.
To help avoid paying tax at the above high marginal rates, there are a number of things you could consider doing and we have included some further details below.
2. Review your pension contributions
Making personal pension contributions can be a very efficient way to reduce your tax exposure. Tax relief is given on amounts contributed to a personal pension scheme at source, which provides basic rate relief. Higher and additional rate relief is given by extending the basic and higher rate limits by the gross pension contribution.
Making personal pension contributions is therefore a very efficient way to reduce tax charges. However, there is a sting in the tail here as restrictions on the amount which may be contributed into your pension scheme apply. Expert advice is needed to make sure you don’t breach any of these limits as this can lead to increased tax being owed.
3. Consider charitable donations
It’s also possible to reduce your tax bill by making charitable donations. Individuals receive tax relief on donations they make to UK registered charities and relief is also available for donations to charities registered in EU member states, Norway and Iceland.
4. Be mindful of your Capital Gains Tax allowance
When it comes to Capital Gains Tax (CGT) – the tax on gains from the sale of assets such as properties or stocks and shares – most of us have an annual CGT allowance before CGT is applicable.
For the 2019/20 tax year, you can make net gains of up to £12,000 before CGT may be payable to HMRC. If you do not use your CGT allowance it cannot be carried forward and is lost. You could consider selling assets to realise gains if this is consistent with your investment strategy.
You could also consider making gifts to your spouse or civil partner to possibly use any lower rates of tax or their CGT exemption, prior to any onward sale. Your spouse or civil partner may also have losses, which could be useful in sheltering any gains you plan to realise.
You should speak to an expert before engaging in any planning to review your particular circumstances.
5. Make use of ISAs and other tax-efficient investments
In 2019/20, the maximum you can invest in Individual Savings Accounts (ISAs) is £20,000. As the income which arises on ISA investments is exempt from income tax and any capital gains are exempt from CGT, ISA investments are a very efficient way to make savings.
There are also a number of other Government-approved tax efficient investments, which include National Savings, the Enterprise Investment Scheme, Seed Enterprise Investment Scheme and the Venture Capital Trusts scheme.
Several conditions must be met for relief to be available under the above schemes and you should seek professional advice before considering making any investments.
6. Call an accountant
Finally, the best way to ensure that your tax planning needs are taken care of is to use an accountant.