Four days left to cut your tax bill!

The current financial year ends on Friday 5 April 2013. NMTBP has produced a checklist of some of the main tax planning opportunities to consider – so get moving!

Make full use of your Isa allowance

The Individual Savings Account has been with us since 1999. Everyone over the age of eighteen is allowed to contribute up to £11,280 to a stocks and shares ISA in the current tax year. If you want to put money into a mix of cash and stocks and shares then you can contribute up to £5,640 into a cash ISA and use the balance of the allowance – another £5,640 – for a stocks and shares ISA

Parents and grandparents can also pay £3,600 into a tax-free junior Isas for their children or grandchildren

If you don’t have money available to put into an ISA this year then consider making use of the allowance by transferring other assets into an ISA such as assets held in Investment Funds, OEICS, unit trusts or shares. If some of these assets are showing a gain then you will be able to offset it against your annual Capital Gains Tax allowance (see below) and place more of your money into a tax friendly environment

At this stage, the best way to apply is probably either online, or in person at a local bank branch

Maximise pension contributions 

The Government has been busily reducing the amount that can be placed into a pension fund each year and still obtain tax relief. The limit in the current tax year is £50,000 gross and for personal pensions (whether an individual arrangement or one operated by an employer) this means the total contributions by employer and employee

Interestingly the government has chosen (to date) to restrict the total contributions rather than the level of tax relief so contributions will still reduce your tax bill by forty pence in the pound if you are a higher rate taxpayer (40%) and fifty pence in the pound if you are an additional rate taxpayer (50%). The top rate reduces to 45% next year so contributions made this year by anyone earning over £150,000 are more tax efficient than those made in the 2013–14 tax year

If you haven’t used your pension allowances in previous years, you can carry forward up to three years’ contributions at up to £50,000 a year, giving a total allowance of £150,000. This can be combined with the current tax year’s allowance, taking the contribution to £200,000 — although you must also earn at least that sum in the current year

The amount you can put into a pension each year will fall to £40,000 in April 2104, so those with the available funds should take advantage of this year’s higher limit. And as the top rate of tax is falling from 50% to 45%, it makes even more sense for top-rate taxpayers to invest the maximum sum

If you don’t have an income then you can still contribute £2,880 each year and the government will add £720 of tax relief (which you haven’t even paid) – that has to be one of the most tax efficient forms of saving!

Modern pension plans are extremely flexible so, if you’re worried about investing when the market is relatively high, you can place your money in a cash fund within the pension and switch into other funds later. Your adviser will be happy to explain the process in more detail – the essential thing is to ensure you meet the 5 April deadline

Review charitable donations

Charitable donations gain tax relief at the highest rate – keep a record of these and enter them on your tax return

The amount which you pay to a charity is “grossed up” so that the charity reclaims tax at the basic rate

For example, if you donate £1,000 the charity will reclaim another 25% or £250 (20% of the gross contribution of £1,000 plus £250). When you enter the donation on your tax return, if the highest rate at which you pay income tax is 40% you will be granted tax relief of 40% on the gross donation. 20% of this (£250) has already been claimed by the charity but your tax bill will be reduced by a further 20% so that the real cost of your donation is £750 rather than £1,000

Use the inheritance tax annual exemption

Inheritance Tax (IHT) is levied at 40% on estates over £325,000 at death – a limit which has been in place since 2009/10 and which is unlikely to change before 2015/16

Most gifts made during your lifetime will be exempt from IHT provided you survive seven years but there is an annual allowance of £3,000 per person which you can give away each year – the value of this allowance has remained unchanged since 1984. It may not seem a significant figure at first sight but if a married couple each give away £3,000 every year then, after ten years, their estate will have been reduced by £60,000 taking £24,000 off the final Inheritance Tax bill

If you didn’t make use of your allowance in 2011–12 you can bring the unused allowance forward, making the total allowance available for a husband and wife £12,000 if used by 5 April 2013

Use your CGT allowance

Capital Gains Tax is payable on disposal of investments and other assets once the gains exceed the £10,600 allowance in the current tax year. After that the tax is levied at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers

Remember, the £10,600 refers to gains not to proceeds so the cash you realise from an investment may considerably more than £10,600 as you have to deduct the original cost from the sale proceeds to calculate the gain

Capital Losses on investments can be set against Capital Gains in the current year or carried forward to offset against future gains so your investment review should also include whether to get rid of “no-hope” investments and at least use them to reduce gains elsewhere

Invest in start-ups tax-free

Invest up to £200,000 in high-risk venture capital trusts (VCTs), which back young businesses without strong track records, and you will qualify for a 30% income tax rebate. Putting in the maximum amount, therefore, would result in tax relief of £60,000

Generally, however, VCT applications can be submitted only by post and the deadlines for VCT investments are often a few days before the end of the tax year. Hargreaves Lansdown, for example, will accept applications only until this Wednesday, so make sure you either use a courier or the Royal Mail’s special delivery service

Enterprise investment schemes (EISs) offer 30% tax relief on investments in small, unquoted companies, provided the shares are held for at least three years. As you can invest up to £1m in an EIS, you could therefore claim back up to £300,000

It is also possible to put up to £100,000 in a seed enterprise investment scheme (SEIS) for start-up firms and receive tax relief at 50%, giving a maximum saving of £50,000. Just remember that risks are high

Avoid the 60% rate of income tax

The most critical level of income is between £100,000 and £116,210 per annum. In this range, the personal allowance of £8,105 is withdrawn at the rate of £1 for every £2 of income earned. The effect is that the tax on income earned in this bracket is a whopping 60%. If you fall in this range, or just over, consider salary sacrifice directly into your pension in order to get under the £100,000

Just to put things in perspective, a 60% rate of income tax was considered a great relief when in was introduced in the 1979 budget – the previous top rate had been 83% with an additional 15% payable if the source of the income was from investments making a total tax rate of 98%

Mind you, VAT was increased from 8% to 15% at the same time so the Chancellor giveth and the Chancellor taketh away…

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