10 tax tips to follow before April
ISAs remain attractive, particularly for higher-rate taxpayers, as they enable them to avoid paying the higher rate of tax on income.
They save an extra 20% of tax on interest and avoid a higher-rate tax charge of 22.5% of gross dividends (25% net) on shares. The limit for cash ISA deposits is £3,600 and the stocks and shares ISA allowance is £7,200.
If you invest in both types, your overall allowance is still £7,200. In October, the allowances for those aged 50 or over were raised to £5,100 for a cash ISA and £10,200 for a stocks and shares ISA and these annual limits will apply to everyone from 6 April 2010.
If you haven't already invested in an ISA this year, you could invest before 5 April up to your limit and again after that date up to the 2010-11 tax year's ISA limit, giving a total investment of up to £17,400 per person (£20,400 for the over-50s) or £34,800 (£40,800 for the over-50s) per couple.
Pension investments are more tax-efficient than ISAs in that you get tax relief on the investment, not just on the income generated from the investment. Also, some of the value, which broadly speaking is 25%, can be drawn out tax-free on retirement.
Anyone, regardless of their income, can invest a gross amount of £3,600 a year in a pension, and it's possible to invest in a pension for a non-working spouse or a child.
The cost to a basic-rate taxpayer of a £3,600 contribution is £2,880 - you deduct 20% basic-rate tax from the investment. The government contributes £720 to restore the contribution to £3,600.
People with earnings can invest up to 100% in their pension each year up to a current annual limit of £245,000. The lifetime investment allowance is £1,750,000.
Inheritance tax tips
You can make a gift of up to £3,000 a year that is exempt from inheritance tax (IHT), along with any number of small gifts with a value of up to £250. If you didn't use your annual exemption of £3,000 last year you can double up this year to make a gift of up to £6,000.
Gifts of up to £325,000 may be worth considering, as they will be 'potentially exempt' and only taxable if you die within seven years of making the gift. Assuming that doesn't happen, then when the seven years have elapsed the gift will be tax-free.
As many assets have fallen in value in recent years, this may be an opportunity to make a gift at a relatively low value, so that even if the asset does come into the tax net because you do not survive the seven years, that lower value would be the value used for IHT purposes, which would save some tax.
Capital gains tax planning
The wide fluctuations in share values in recent years offer valuable tax-planning potential. If you are sitting on heavy capital losses, you could sell some shares, crystallise a loss and set it against gains made this year.
Any gains in excess of the annual exemption limit of £10,100 are taxed at 18%, so if you have gains exceeding this figure, it's worth selling shares that are currently worth less than their original cost to absorb gains above the annual exemption limit.
For example, if an investor sold assets last October and made a gain of £20,000, after deducting the annual tax exemption of £10,100 there would be a taxable gain of £9,900.
At 18%, the capital gains tax bill would be £1,782. But if a loss of £9,900 can be realised, this bill could be wiped out altogether. Any losses realised above this level would be wasted, as they would reduce the net gain below the £10,100 exemption.
Gifts of income-producing assets to your children are ineffective for income tax-planning purposes, unless the total annual income is below £100.
However, once your children are 18, if you wish to support them, rather than give them a monthly allowance paid out of your taxed income, you could give them assets, the income from which will be taxed at the rate they pay.
If they have no other income, the first £6,475 of income is covered by their personal allowance, so no tax would be payable.
Under the self-assessment tax system, tax instalments payable in January and July are normally based on the previous year's tax bill.
This is fine when income is rising, as there should be a final payment to make up the difference when your tax return is filed. But where income is falling, people tend to end up paying too much tax.
You can ask HM Revenue & Customs (HMRC) to reduce your instalments by completing an SA303 form.
However, you need to make a realistic estimate of the eventual tax bill, as if you overstate the payment reduction you require and pay too little tax HMRC will charge interest on the underpayment.
Tax code corrections
HMRC has been heavily criticised for issuing incorrect tax code notices. These affect the level of tax deductions from your salary. If you believe your code is wrong you should contact your tax office. The codes are often based on the previous year.
So if, for example, you had untaxed income in the previous year, such as rental income or income partially taxed at source but at a lower rate than you should pay, HMRC will often try to collect this additional tax via your tax code.
But if your income from such sources has fallen you should let HMRC know so the code can be corrected.
Freelancers and other self-employed individuals who make a loss can set the loss against income in the year of the loss or carry it back to the previous year.
For example, if you make a loss in the current year 2009-10 you could offset that loss against income in either 2009-10 or 2008-09.
The chancellor altered these rules in the recession to provide more flexibility, so that losses of up to £50,000 in 2008-09 and 2009-10 can be carried back a further two years to offset what may have been more healthy profits in previous years.
In addition, losses that arise in the first four years of the business can be carried back up to three years. Claims to carry back losses in 2008-09 must be made by 31 January 2011.
Enterprise investment schemes
If you subscribe for new shares in an enterprise investment scheme, you get 20% income tax relief on the amount subscribed up to a limit of £500,000 a year, as long as you hold onto the shares for three years and have paid enough income tax.
But if your income tax bill is just £50,000, for example, you can only get tax relief on £250,000 worth of shares (£250,000 x 20% = £50,000). You can request that the tax relief is backdated.
Making gifts to charity
Most people are aware that if they make a gift aid declaration the charity will receive additional income from the government. For example, if you pay £100 to a charity the gift aid declaration will trigger a further £25 from the government, so the charity receives £125 in total.
To protect charities from the effect of the fall in the basic rate of tax from 22% to 20% until 5 April 2011, charities receive an additional 3% of the gross gift, so they actually receive £128, which is what they got when the basic rate was 22%.
Higher-rate taxpayers should make sure they claim the payment on their tax returns, as higher-rate relief is also available. The effect is to reduce their tax bill by a further 20/80ths of the gift, thereby reducing their tax bill by £25.
This article was originally published in Money Observer - Moneywise's sister publication - in March 2010
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Enterprise Investment Scheme
A scheme set up to encourage investment into small, unquoted trading companies and give investors tax breaks to compensate for taking risk. Because the companies in the scheme are not listed on a stock exchange they often carry a high risk, so the tax relief is intended to offer some compensation. An EIS company cannot be a subsidiary, must trade wholly in the UK, can’t employ more than 50 people and certain activities (including forestry, farming and hotels) preclude companies from offering EIS relief.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.