As the end of the current tax year approaches on 5th April 2020, it’s a good time to provide a quick reminder of the allowances which you may want to take advantage of as you are getting your tax affairs in order…
With a cash ISA or a stocks and shares ISA (or a combination of the two), you can save or invest up to £20,000 each year per person, meaning that a married couple can invest up to £40,000 between the two of them.
ISAs grow tax free and can deliver a tax free income so are useful for all ages, whether you are just starting out building savings and investments or are looking to access a tax efficient income in retirement.
Pension contributions can be a great way to reduce your tax liabilities. A personal contribution of £8,000 net is grossed up immediately to £10,000 with basic rate tax relief and if you are a higher rate taxpayer you can claim a further £2,000 back.
If you are a member of a registered pension scheme and have earnings from employment or self employment you may be able to make use of the full £40,000 annual allowance, which in some circumstances you can carry forward for up to three years. Employer contributions are also an option, or a combination of the two.
For the high earners among you however, it’s important to note that the annual allowance may be restricted and those with significant funds should also keep the lifetime allowance in mind. The current lifetime allowance is set at £1,055,000 but above this level tax charges can arise.
It’s complicated! But advice is on hand so do call on us, especially our ‘Next Gen’ clients. We may not be running your pension scheme for you but we can guide you if you have any funding queries.
Enterprise Investment Schemes (EIS)
For those who are restricted in terms of pensions funding, investment in EIS, Seed EIS or Venture Capital Trusts can offer a valuable 30% income tax relief and can have other longer term tax advantages. However they come with a higher risk wealth warning but do speak with us if this is an area of interest.
The current tax-free threshold is set at £325,000 for single individuals and £650,000 for married couples. Anything over this amount will be taxed. Inheritance tax is where a little bit of planning can make a big difference. This might be by making full use of your annual gift allowance of £3,000 (£6,000 for married couples), putting assets into trust or gifting from surplus income.
A new IHT Residence Nil Rate Band (RNRB) was introduced in April 2017. It is in addition to an individual’s own nil rate band of £325,000, and conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren). It is being phased in over 4 years and the full £175,000 allowance will be available from April 2020. The Residence Nil Rate Band will be transferable between spouses and civil partners on death, much like the standard nil rate band.
As ever, there is a sting in the tail though and this additional relief is only available to estates below £2m overall so many of our clients will not benefit but this is one to be aware of in wider family estate planning and a review of Will planning for parents or grandparents might be beneficial so do call on us for guidance.
Capital Gains Tax
Capital gains tax is a tax on the profits you make when you sell something, such as a second home or a personal possession worth £6,000 or more, except for your car. The tax-free allowance for the 2019/20 tax year is £12,000 per person so couples can pay no tax on a total of £24,000 of gains.
We refer to the use of this allowance as ‘annual tax harvesting’ and it is part of our investment process. If you don’t use it you lose it so this needs planning. It’s important that clients let us know if they have made gains we are unaware of or indeed losses as we can carry them forward and use them too!
This allowance has been up and down like a yoyo and is currently set at £2,000 per annum so if you hold direct shares or have funds invested in a personal portfolio/general investment account you can receive the first £2,000 of dividend income tax free.
Above that dividends are only taxed (currently) at 7.5% for a basic rate taxpayer so structuring a portfolio to make use of not just the ISA allowance but any available basic rate tax band is preferable.
For those clients who have established family investment companies, the tax free dividend allowance is a great way of distributing profits to minority shareholders.
The Junior ISA limit is set at £4,368 for this tax year. Parents and grandparents can take the opportunity to give the family’s youngsters’ savings a boost by making use of this allowance. The only point to be aware of is the money is theirs and although they can’t get hold of it until they are 18, from 16 the child has the opportunity to take charge of decisions. So early intervention is recommended to help educate them about the merits of tax efficient savings and the benefits of putting the money to good use.
Last, but most definitely not least is the ability to make a charitable donation and benefit from Gift Aid.
A donation of £1,000 allows the charity to claim £250 in gift aid. You then pop the total gift of £1,250 on your tax return and if you are a higher rate tax payer you can claim a further 20% tax relief resulting in a tax saving of £250. So for a cost to you of just £750 you’ve made a far more significant contribution.
Note: Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April). The tax could have been paid on income or capital gains.
We are privileged to be able to support our clients in achieving their philanthropy goals. If you need help planning your gifting, or would like to know more about setting up your own Family Foundation to direct your giving to causes that are important to you, please do not hesitate to get in touch.
Next stop – Budget 2020
With a Budget scheduled for 11th March 2020, we may well be in for some changes over the coming tax year. It is possible that allowances or reliefs could be reduced. We will be ready to provide guidance but in the meantime we will continue to help you to make the most of the legitimate tax reliefs and allowances available to them as part of our investment process and ongoing review service.
If you have any queries or require more information please don’t hesitate to get in touch.