March is the perfect time to do a little spring cleaning, and we don’t mean with a mop and bucket! The tax year ends on the 5th April 2018, and a new tax year is starting. So get a head-start on your new tax year resolutions by following these tips.
Firstly, assess your 2017-18 tax year, gather up all those papers and plug your data into this handy UK Tax Calculator to get a quick overview of your situation. This calculator has now been updated to include the tax year 2018-19, so you can repeat the process with your predicted values once you’ve made a few tweaks.
With the arrival of the Workplace Pension Scheme, most people are now paying into a pension manditorially, the only exception being the self employed sector. If you’re self employed and not paying into a pension, this is perhaps the most important new tax year resolution you need to keep! Take a look at our Freelancer Pension blog here.
For those who have a pension in place, private or workplace, consider if you’re able to top it up a little every year. You can add to your pension pot until you reach the £40,000 per year limit, however if you’ve been under the limit within the last three years you can carry your allowance forward and top up a little extra. Plus if you’re a higher rate taxpayer, topping up your pension will provide you with a little tax relief.
Child / Family Member Stakeholder pensions are another way to ensure you’re being as tax-efficient with your money as possible, while providing a little more financial security for young family members. You can contribute up to £2,880pa which comes complete with a Government contribution of £720pa.
And remember, simply waiting for your state pension may leave you feeling short-changes, especially with the state pension age on the rise along with the cost of living, here’s our State Pension blog if you’d like to know more.
The Annual Gift Exemption is a great way to avoid paying unnecessary Inheritance Tax, you can gift up to £3,000 pa, reducing your tax exposure year on year and saving beneficiaries from that harsh 40% Inheritance Tax. Bare in mind that if you haven’t used your previous tax year’s allowance, it can be carried forward, ie: You could pay out up to £6,000 if you transfer the money before the 5th April, and then still be able to transfer an additional £3,000 from 6th April for the 2018-19 tax year. So if you have a little extra and Inheritance Tax is a concern, plan now while you still have a few weeks to arrange your assets and gain the maximum benefit.
You can also go over the £3,000 threshold, in which case the excess becomes a ‘Potentially Exempt Transfer’ which takes seven years to clear your estate for Inheritance Tax purposes. So as long as a seven year wait isn’t expected to cause a problem, feel free to transfer as much as you like, but be aware there may be a Capital Gains Tax implications on your gift.
And in addition, if the Annual Gift Exemption isn’t going to be suitable for your requirements you could consider setting up a Trust. Trusts are a little more complex and require an overview of your personal financial situation. If you’d like to discuss Trust with our accountants, please call and arrange an appointment.
You can also transfer assets to your spouse or civil partner if they are a lower rate taxpayer, this can result in a Capital Gains Tax saving for you. You can also transfer assets to a charity, helping your tax efficiency in the same way.
Remember you can contribute up to £20,000 into the basic ISA and pay no Capital Gains Tax on this investment. In addition, depending on your circumstances, there are a variety of other ISAs available, take a look at the Help-To-Buy ISA and the Lifetime ISA.
Consider making an investment to reduce your tax exposure, you can invest in businesses or property (houses, land, art, etc…). There are various business investment schemes that you could consider including The Enterprise Investment Scheme, Venture Capital Trusts and the Seed Enterprise Investment.
And when it comes to property investment, buying a second home could result in tax-efficiencies, but be aware that if you plan to rent a home there are more strict tax regulations on the way for Landlords. In addition, if you have a mortgage that is flexible enough to allow a lump-sum payment, you could consider putting more money towards a current home to save on your tax bill.
If you currently receive annual dividend payments, be aware that the tax-free threshold is about to change. From 6th April 2018 only the first £2,000 will be tax-exempt (was £5,000 pa). Any dividend payments over the £2,000 limit will be taxed at 7.5% (basic rate, 32.5% (higher rate) and 38.1% (additional rate).
So if you’re currently under the £5,000 limit, consider drawing a dividend to bring you up to the £5,000 limit before the end of this tax year. And if you usually draw £5,000 or more, calculate the difference in tax you’ll be paying in the new tax year and plan accordingly.
Obviously every individual’s situation will be quite different, and many people feel happier having an accountant take a look at the bigger picture to help navigate the complicated world of UK tax at this time of year.
If you’d like the help of one of our accountants, call us today to arrange your free no-obligation phone consultation. We look forward to helping all of our clients be as tax-efficient as possible in the new tax year.