Now that the fun of Christmas and New Year is over, the tax year-end on 5th April is fast approaching. So now is the perfect time to put in place strategies to make sure you’re being as efficient as possible when it comes to tax.
The best way to do this is through good planning and even better timing so that you maximise your tax relief without falling foul of HMRC rules.
Read on for information on some of the basics.
Make sure your tax code is correct
Check your tax code each year (the numbers and letters on your payslip). Are your name, address and National Insurance number right? Does it state the right employer?
Check the letter at the front of your tax code. For example, L is used for anyone getting the basic personal allowance. Look out for 0T – this is the emergency tax code so you’ll probably be paying too much tax. K means you get no tax-free pay or owe money to HMRC. If you’re on the wrong code, you may be paying too much or too little tax.
Take advantage of the Individual Savings Account (ISA) allowance and Help to Buy ISA
Make sure that you fully use your tax-efficient ISA allowance.
From 1 April 2015, the annual limit increased to £15,240. This can all be allocated to one cash ISA and/or one stocks and shares ISA each year.
The interest received on these savings and investments is tax free. Higher-rate taxpayers don’t have to pay any further tax on dividends from investments and you don’t have to declare ISAs on your tax return.
From 1st December, a new Help to Buy ISA was made available to help first-time buyers save towards the purchase of their first home. This means that you might be able to save up to £200 per month, into your Help to Buy ISA. To kickstart your account, in your first month, you can deposit a lump sum of up to £1,200.
The minimum government bonus is £400, meaning that you need to have saved at least £1,600 into your Help to Buy ISA before you can claim your bonus. The maximum government bonus you can receive is £3,000 and to receive that bonus, you need to have saved £12,000. When you buy your first home, your solicitor or conveyancer will apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home.
There are a few restrictions to the scheme so it’s worth speaking to an expert to find out more.
Provide for your children with a Junior ISAs
Junior ISAs (the replacement for Child Trust Funds) are a good long-term savings option for a child’s future. It also helps them to avoid being taxed on gifts you make to them. In the tax year 2015/16, the Junior ISA allowance is £4,080.
Save tax with pension contributions
Take advantage of tax reliefs and (tax-deductible) employer contributions to build a fund for your retirement. Personal contributions to pension schemes attract tax relief at your highest rate, making them an ideal tax-efficient investment vehicle.
For pension contributions to be applied against your 2015/16 income, you must pay on or before 5 April 2016. The basic annual allowance cap on pension savings is £40,000 for 2015/16.
Transferring assets could offer tax benefits
If you’re married and don’t own assets in some form of joint ownership, it may be advantageous for tax purposes for transfers to be made to ensure joint ownership. Consider transferring savings and investments to your spouse if they pay a lower rate of tax than you do. Complex rules apply, but if appropriate to your particular situation, it could provide benefits for income tax, capital gains tax and even inheritance tax.
Age-related allowance eligibility
If you were born before 6 April 1948, check if you are eligible for an increased Personal Allowance.
The Gift Aid scheme is for gifts of money to charities by individuals who pay UK tax. Charities can reclaim tax on any donations made by individuals, whether large or small, regular or one-off – provided the conditions for the tax relief are satisfied.
Gift Aid donations are regarded as having basic-rate tax (20%) deducted by the donor. If you are in a higher tax bracket, you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
Fully utilise your capital gains tax allowance
Capital gains tax is a tax on the profit when you sell or ‘dispose of’ an ‘asset’ that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.
For individuals, capital gains in 2015/16 under £11,100 are tax-free. Married couples who own assets jointly can claim a double allowance of £22,200.
Capital gains tax is charged at 18% on your total taxable income and gains (up to £31,785) if you are a standard-rate taxpayer, and 28% if you pay tax at a higher rate (from £31,786).
Plan ahead for inheritance tax
Everyone has a current tax-free allowance of £325,000, known as the ‘Inheritance Tax threshold’. Inheritance tax only applies to the value of your estate above this at a rate of 40% on death. However, transfers between married couples are exempt from inheritance tax, or the seven years prior to death, and if the threshold is not used on the first death. This means that the value of your estate on the second death that will be exempt from inheritance tax doubles up to £650,000.
Lifetime gifts are not normally counted as part of your estate for inheritance tax purposes if you live for a further seven years after making them so it might be worth planning whether you want to make any gifts to your family now.
Make a will
If you die without a will, your estate could be distributed in a way you wouldn’t have chosen.
Write a will and keep it up to date to reflect changes in the family situation, especially if you get married or go through a divorce.