Strategies to help slash your tax bill

Published by Phil Leiwy on 22 March 2013.
Last updated on 27 March 2013

Among the tax planning ideas with particular resonance at this time of year is one that takes advantage of the drop in the top rate of tax, on income above £150,000, from 50 to 45%.

Investment bank Goldman Sachs felt compelled to announce that staff bonuses will not be deferred to the next tax year - a tactic that would have saved its staff five percentage points in tax - to assuage public feeling. However, many taxpayers will want to take the opportunity to defer income until after 5 April and reap some tax savings.

There is no reason why you should not delay when a dividend is taken from your private company until the new tax year - it's for the directors to decide.

If you are self-employed, there is no reason to not bring forward some legitimate business expenditure - on advertising, stationery or even assets, for example - in order to get tax relief at the higher rate. Landlords might decide to get that roof repaired in March rather than April.

Pension ploys

Many people are confused about the personal pension contribution limits. You can actually pay up to your whole salary (or your net profit if you are self-employed) into your pension, but you only get full tax relief at your marginal tax rate on contributions up to the annual allowance, which is currently £50,000 (this will drop to £40,000 in April 2014).

There is an overall lifetime limit of £1.5 million (dropping to £1.25 million in April 2014).

If you have no earnings, you can still pay up to £3,600 gross contributions into a personal pension.

So if your marginal tax rate is 50%, the net cost to you of contributing £50,000 is only £25,000. If you contribute above the level of the annual allowance, there is a tax clawback charge of 50% of the gross excess contribution.

One pitfall to watch out for is that if an employer also contributes to a scheme, its contribution must be taken into account in determining whether you breach the annual allowance limit.

For example, Alan, whose salary is £200,000, pays £2,000 net into his personal pension scheme each month. This equates to £2,500 gross, because he pays it after deducting the basic rate of tax - 20%.

In other words, he gets the basic rate of tax relief at the time he pays the contribution. So over the year, he pays £24,000 net or £30,000 gross, which is well within the annual allowance.

As his income is above £150,000, his marginal tax rate is 50%. He gets 20% tax relief at source on payment of contributions and the other 30% when he files his tax return and calculates his overall tax position.

That's all fine and dandy, except that Alan's employer also pays £2,500 a month into the scheme. As an employer's contributions are also taken into account, Alan actually finds himself having paid £10,000 above the annual allowance.

here is therefore a tax charge of £5,000 (£10,000 x 50%) on that excess pension investment. This reduces the overall tax relief on his contributions from 50% to a more modest 33%.

If you haven't paid up to the annual limit in the three previous years, there may be scope to make payments above the current year's threshold, but often people pay the same amount each year and the clawback tax would apply annually.

Remember, the top rate of tax will drop from 50 to 45% from 6 April, so the tax relief on income above £150,000 drops from 50 to 45%. If you can choose between paying, say, £40,000 into your pension scheme before 5 April or after, bear in mind that the tax relief will drop from £20,000 to £18,000 after that date.

With the annual allowance dropping to £40,000 in 2014, this will bring more people into the tax clawback rules.

Capital gains tax tactics

The stock market has risen considerably in recent months, so many people could be sitting on significant capital gains.

I covered some CGT planning strategies in the January edition - bed and breakfasting, and bed and Isa - but what else can be done to minimise CGT bills?

Everyone has an annual exemption of £10,600, so gains up to this level are tax-free. Above that, gains are taxed at 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.

This means if you are a basic-rate taxpayer your first slice of taxable gains is taxed at 18% and the rest at 28%. For example, Sue has a gross salary of £30,000 and makes a gain this year of £50,000. This is reduced by the CGT annual exemption of £10,600 to leave her with a taxable gain of £39,400.

This sum is then split between the part that uses up what is left of her basic-rate tax band, £12,805, which is taxed at 18%, and the remaining £26,595, which is taxed at the higher rate of 28%.

You can transfer assets to your spouse or civil partner so that they then sell to a third party. The transfer is treated as taking place at "no gain/no loss". The effect of this is that your partner is treated as owning the asset from the outset and any gain (or loss) is taxed as if it is theirs.

This way, you make use of your spouse or civil partner's annual exemption, or their basic-rate band, if yours is used up, so that the gain is taxed at 18% rather than 28%.

Remember, losses are off set against gains in the year, before taking into account the annual exemption. If you have made significant losses earlier in the year, crystallising gains by selling assets standing at a profit will use up those losses before the annual exemption.

If, however, you transfer those assets to your spouse or civil partner and they make the gain, you can carry your losses forward to use in a future year. It is worth noting that losses carried forward are only used after a future year's annual exemption has already been covered.

For example, if you carry £10,000 of losses forward and next year you make gains of, say, £15,000, this will be set against next year's annual exemption of £10,600, leaving gains of £4,400. The loss carried forward will be set against only this amount of the gain (£4,400), so there is no tax to pay and the remaining loss not utilised, of £5,600, is carried forward.

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