The end of tax year (5 April) is a popular time for making sure that Gordon Brown is not taking a greater slice of your income, savings and investments than is really necessary. Thanks to the host of tax breaks and allowances available to UK residents, sensible tax planning could save you hundreds, or even thousands, of Pounds. As a starting point you should review the three key annual tax allowances:
Income Tax – Annual 2006/07 tax-free allowance £5,035
Couples should make the most of this individual allowance when organising their savings and investments. For example, if one is a higher rate taxpayer and the other a non-taxpayer then holding savings in the latter’s name will save tax as they can request the interest is paid gross (by completing HMRC form R85).
Capital Gains Tax (CGT) - Annual 2006/07 tax-free allowance £8,800
While investment gains are liable to tax, they can be offset against this annual allowance. The allowance is lost forever if not utilised during the tax year, so it’s well-worth using if appropriate. Losses incurred in the current tax year must be set against gains before using the allowance and you can carry forward losses from previous tax years. Gains on transfers between spouses can be ‘held over’ so that the transferee receives the gift at the original purchase price. This is a useful way for partners to use two annual exemptions in the same tax year if the transferee then sells.
Inheritance Tax (IHT) - Annual 2006/07 tax-free gift allowance £3,000
Whereas you normally have to live for seven after making gifts before they fall fully outside of your Estate for IHT purposes, gifts within this allowance fall outside immediately. If unused, it can also be carried forward for one year so that, for example, a couple could gift up to £12,000 in total with no liability to IHT. In addition, any gifts which can be shown to be part of surplus income can be gifted without being subject to the seven year rule.
If you wish to save or invest money there is also a range of other ways to save tax, including:
Individual Savings Accounts (ISAs) - Annual 2006/07 allowance £7,000
Income and gains from investments held within ISAs do not need to be declared on your tax return. Although basic rate taxpayers do not save tax on dividends from stocks & shares, interest (i.e. from cash and corporate bonds) is truly tax-free. The benefits of ISAs are cumulative, so last year’s announcement by the Treasury that they will remain in existence long term is excellent news. The current annual allowance is £7,000, of which £3,000 may be held in cash. These are due to change to £7,200 and £3,600 respectively from 6 April 2008. If you are investing in funds then there is usually no additional charge for the ISA wrapper so it really is a no-brainer for taxpayers to invest the first £7,000 each year in this way.
You can invest online with competitive discounts here.
Pensions – Annual 2006/07 allowance the lesser of £215,000 and your earnings
The attraction of pensions is that you enjoy tax relief on contributions at your marginal rate. This means that a £100 contribution effectively costs a basic rate taxpayer just £78 and a higher rate taxpayer £60. Non-taxpayers also enjoy basic rate tax relief on gross contributions up to £3,600, making stakeholder pensions a popular way to save for non-working spouses and children. There is also no tax within the fund. However, pension tax relief is less generous than it seems at first sight because you will ultimately pay tax on the income you draw. Nonetheless, it still looks attractive overall provided the Government makes no more retrospective changes. Once invested, you cannot get your hands on a pension until at least age 50 (55 from 2010), so you may need to invest for the long term.
For more details on Stakeholder Pensions and to download an application form, click here.
National Savings Certificates – Current allowance £15,000 per issue
These are fixed term tax-free savings products. The Index-Linked Certificates are especially attractive to taxpayers seeking low risk as they guarantee to beat inflation after tax. The three year 14 th Issue Index-Linked Certificates pay 1.15% plus RPI which, based on February’s RPI of 4.6%, is equivalent to nearly 9.6% gross a year for higher rate taxpayers.
There are also a number of more complex investment tax shelters such as Offshore Bonds, Venture Capital Trusts, Enterprise Investment Schemes and Business Property Relief on AiM shares. While the tax advantages on these can be worthwhile, specialist advice can help avoid costly mistakes. For more details please call us on 020 7189 9999.
Perhaps the biggest tax saving misconception is offshore bank accounts. Contrary to popular belief these offer no tax saving to UK residents. Although paid gross, interest is taxable and must be declared on your annual tax return. HMRC is actively clamping down in this area and now receives information on these accounts from most jurisdictions.
Optimising your finances to keep the taxman at bay could prove time very well spent. However, never let tax incentives rule your head, there’s no point buying tax efficient investments if they are unsuitable.