As the UK hurtles towards Brexit, uncertainty abounds. For George Bull, a senior tax partner at RSM UK, this is all the more reason for prudent advisers and their clients to reduce their tax liabilities. “Despite the unprecedented levels of uncertainty facing the UK, people should be thinking about their tax affairs as we approach the fiscal year end,” he says.
For the ACCA’s Chas Roy-Chowdhury, simple is best. “There’s no need to look at complex tax avoidance schemes or anything that can cause more trouble than they’re worth long term,” he says. The basics are a great starting point, but there are also some lesser-known strategies that can be used to good effect.
1 Max out the personal allowance
The first principle of year-end tax planning, according to Chas, is to ensure clients and their spouses are using their allowances to the maximum. The standard personal allowance for the current tax year is £11,850.
“If one partner works part-time or occasionally and has not yet used the entire allowance, think about the opportunity to do so,” says Chas. Everyone has a personal allowance from birth. Children can use their allowances by working or having savings income from non-parent sources.
2 Avoid 60% tax
One key task is to work out what a client’s 2018/19 taxable income is likely to be, and to identify what can be done about the resultant liability. The personal allowance is reduced by £1 for every £2 of taxable income over £100,000. “This means people with taxable income in the band £100,000 to £123,700 suffer an effective tax rate of 60% on that slice of income,” says George.
“Gift aid or pension contributions can be used to reduce the tax exposure. In some circumstances, those payments may fully restore the personal allowance – well worth the effort!” The annual allowance for pension contributions is £40,000 for those working who haven’t already crystallised part of their pension.
3 Use a spouse
Big life changes can impact an individual’s tax bill at the end of the tax year. For instance, clients who got married or entered into civil partnerships during the current tax year could benefit from the married couple’s allowance.
This enables the transfer of up to £1,185 of personal allowance (10% of the personal allowance) to a spouse – cutting the beneficiary’s tax bill by between £336 and £869.50. Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another is another tool to optimise tax allowances.
4 Share ownership of assets
Dividing interests in assets, such as property, providing it’s done correctly and in an approved manner, can help to spread income between higher and lower-earning partners or spouses, reducing their joint tax bill. “You do not have to pass 100% of the ownership of the asset to your spouse; in fact you could pass as little as 1% of ownership,” says Tim Walford-Fitzgerald, private client partner at HW Fisher & Company.
“What matters is the income that is generated from the asset. By passing just 10% of the ownership of a buy-to-let property to your spouse you pass on 50% of the tax liability on the income from that property.” Factors to consider include the size of any mortgage and value of the property. “If you transfer too much of the asset, or rather the liability, to a spouse, that transfer may become liable to stamp duty,” adds Tim.
5 Transfer shares
Likewise, for clients who are liable to pay higher rate tax on dividends, it is worth exploring the possibility of transferring shares to a spouse. Dividends held outside tax wrappers have been subject to dividend tax since April 2016.
The allowance for tax-free dividends was £5,000 in 2016/17 and 2017/18, but cut to £2,000 in 2018/19. Above that, dividends are taxed at 7.5% within the basic tax rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.
6 Donate to charity
Donations to charities are tax free. The charity can claim the tax back through gift aid. Clients who pay higher or additional rate tax can also claim back the difference between the basic and higher rate of income tax on any donations. Claim through their self-assessment tax return or ask HM Revenue & Customs (HMRC) to adjust their tax code.
“You will need to do this by calling HMRC and asking for a P810 form,” says Chas at ACCA. “Keep records showing the date and amount donated.” A flexible option enables relief on gift aid contributions to be carried back to the previous tax year – useful for self-employed people who might not know their annual income until their tax return is calculated. The donation and corresponding election must be made before the self-assessment filing deadline (31 January after the end of the tax year).
7 Gift out of income
An increasing number of people are aware that gifts of up to £3,000 per year can be made without falling foul of inheritance tax (IHT) rules. Fewer people are aware that unused allowance from the previous year can be rolled over, meaning £6,000 can be given as a tax-free gift, suggests Phil Hall, head of public affairs and public policy at the AAT.
Another lesser-known fact is that high net worth individuals can give far greater sums of money as long as they can prove it’s out of surplus income and the gifts are made regularly. You must be able to prove the money is genuinely surplus. “This requires you to prove the income is surplus to your normal standard of living. And remember you must intend to make regular gifts, but not necessarily of the same amount each year. Evidence is crucial to support your assertions,” adds Tim at HW Fisher.
8 Don't leave money on the table
Most employees wrongly assume that they automatically get tax relief on their pension contributions. This is only the case for basic rate taxpayers. Some higher rate taxpayers receive relief if their employer takes workplace pension contributions out of their pay before deducting income tax, but many don’t, according to Hall.
“So, if you’re a higher rate taxpayer and your pension scheme is not set up for automatic tax relief, you should contact HMRC to claim what’s rightly yours. This is especially important for the two-thirds of taxpayers who don’t complete a tax return.” Ensure clients are paying the correct amount of tax, too. “It sounds obvious, but many people fail to check their tax code and end up paying too much tax.”
Visit gov.uk/tax-codes to check.
9 Contribute to a grandchild's pension
It is common to advise clients to ensure they make full use of their and their spouse’s annual pension and ISA allowances. Less well known is the ability to make pension contributions for a grandchild. A contribution of up to £2,880 can be made per year, which would equate to £3,600 with tax relief. “That top-up is free money as no-one needs to have paid the tax the government is adding back,” says Tim.
10 Invest in enterprise
Tim highlights the enterprise investment scheme (EIS) as a “useful allowance on several fronts” for clients willing to take a reasonably significant level of risk. The EIS offers 30% upfront income tax relief on investments in small to medium-sized enterprises, as well as exemption from capital gains tax (CGT) – useful for those who invest in a company that proves successful and provides a significant return on the original investment.
“People who invest in this way can also defer the CGT liability on other shares they sell until they dispose of their EIS investment. It is still possible to make such an investment now and it remains possible to carry back the tax relief in the 2017/18 tax year, allowing retrospective tax planning,” he adds.
Chas Roy-Chowdhury is head of taxation at the ACCA (the Association of Chartered Certified Accountants) and has prior experience in public practice
George Bull, RSM's senior tax partner, believes that tax systems should be fair, clear and proportionate in their impact, and since most fall short works with clients to explain complex issues and produce workable solutions
Phil Hall is head of public affairs and public policy at AAT (the Association of Accounting Technicians) having previously worked for an MP, the government, the London Institute of Banking & Finance and as a consultant
Tim Walford-Fitzgerald, a partner in HW Fisher & Company, has worked in private client taxation for 20 years, advising high net worth individuals, their associated businesses, trusts and families
Jennifer Hill is a former deputy money editor of The Sunday Times, personal finance correspondent of Reuters and personal finance editor of The Scotsman.