Year end tax planning

16 February 2018

The UK tax year ends on 5 April and so February and March can provide a last-minute chance to save some tax with a bit of careful planning. 

Use your Individual Savings Account (ISA) allowance

The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple invest £40,000 before the end of the tax year on 5 April. There is no Capital Gains Tax (CGT) and no tax on UK income and no need to declare this on your tax return. If you do not make use of your ISA allowance it cannot be carried forward, so “use or lose it”!

Top up your pension pot

The standard annual pension allowance is £40,000 per person in the current tax year. This is reduced if your income exceeds limits or have taken pension benefits previously. However, if you are a higher-rate or additional-rate taxpayer, you can claim the extra tax relief. You can also carry forward any unused annual allowance from the three previous tax years, so long as you were a member of a registered pension scheme.   

Capital Gains Tax (CGT) allowances

Individuals have an annual CGT allowance that currently enables them to make gains on investments of up to £11,300 free of tax.  Any gains in excess of the allowance are charged to CGT at either 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Married couples may be able to use each other’s allowances by transferring assets before they are sold. 

New rules on Inheritance Tax (IHT)

The new ‘residence nil-rate band’ (RNRB) now enables a ‘family home’ to be passed wholly or partially tax-free on death to direct descendants. This extra tax-free amount is phased in over four years, initially at £100,000 for 2017/18, rising each year to reach £175,000 each in 2020/21. The RNRB is in addition to an individual’s own nil-rate band; currently £325,000 per individual.

Additional rate taxpayers

If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. Therefore, if you earn £121,200 or more, you will not receive a tax-free personal allowance at all. The additional rate income tax (45%) is also charged on earnings over £150,000. Pension contributions and moving investments to a lower-rate tax-paying spouse could reduce this liability.

Tax-efficient investments

The Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and the Seed Enterprise Investment Scheme (SEIS) are worth a thought. EIS investments offer an Income Tax credit and CGT deferral.  

Utilise your spouse’s personal allowance 

If your spouse is a lower or non-taxpayer and you have income producing assets (for example, buy-to-let property or even saving accounts), you could put these in their name to lower your overall Income Tax liability. Assets can be passed between spouses without any CGT liabilities. 

For more information on tax planning, contact Ann Bibby.