The end of the tax year is looming. Whilst planning for our financial futures should be a year-round activity, 5 April presents an immoveable deadline for actions which really are ‘use it or lose it’ opportunities. In these austere times, chances to maximise the potential return on our money and minimise our tax bills should not be overlooked.
For many, failure to act will have very simple consequences: a poorer retirement or paying too much tax. This note highlights the key tax-year-end planning opportunities to consider in discussion with your St. James’s Place Partner.
Have you fully utilised your ISA allowance?
Your annual ISA allowance of £11,280 is a valuable tax-efficient opportunity to provide income or build capital for the future. You can invest the full allowance in a Stocks & Shares ISA, but the savings limit is £5,640 in a Cash ISA.
The average Cash ISA rate is currently just 0.65% (source: Bank of England, January 2013) and only two Cash ISA accounts currently pay a rate that beats inflation (source: Moneyfacts, January 2013). The reality is that the tax benefits provided by ISAs are best maximised by investing for the long term in assets capable of achieving capital growth and rising income.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
Have you maximised your pension annual allowance?
The average pension savings pot in the UK will last just 7 years, based on what most people believe they need as a retirement income (source: HSBC, February 2013). Clearly, many people need to do more to plan for their retirement and pensions remain one of the most effective ways to provide for your future. The annual allowance of £50,000 is the maximum amount of pension contribution in a year on which an individual can receive tax relief. A £50,000 pension contribution for a higher rate taxpayer saves £20,000 in Income Tax.
Are you able to make pension contributions of over £50,000 this year?
It may be possible to use ‘carry forward’ to make larger contributions now. Those using their allowance for 2012/13 have until 5 April to carry forward unused allowance from 2009/10. If you have used up these allowances yet want to maximise contributions to secure 50% tax relief you should consider accessing the £50,000 allowance for the 2013/14 pension input period. This could be particularly helpful for individuals or companies who had an especially good year.
Are you an additional rate taxpayer?
Although the reduction in the additional rate of Income Tax that applies to income in excess of £150,000 from 50% to 45% is welcome, it also means that from 6 April 2013 there is a corresponding reduction in tax relief to 45%.
The 5% reduction in tax relief has the effect of increasing the cost of pension contributions by 10%. A gross contribution of £20,000 currently costs an additional rate taxpayer £10,000 after tax relief, but from 6 April 2013 the net cost will increase to £11,000 – 10% more.
You can save 10% on pension contributions by taking action before 5 April.
Have you received a bonus in this tax year?
Sacrificing a bonus in this tax year in favour of an employer pension contribution could mean employer and employee National Insurance savings; and a reduction in taxable income, potentially recovering personal allowance or avoiding tax on Child Benefit.
Have you used your annual Inheritance Tax gifting exemption for this (and last) tax year?
The annual Inheritance Tax (IHT) gifting exemption is £3,000. Unused exemptions can be carried forward for one year but after that will be lost. So, within married couples or civil partnerships, £12,000 could potentially be given away, free of IHT.
Are there children or grandchildren for whom you could invest in a Junior
ISA or a pension?
As a potential use of the annual gifting exemption, Junior ISAs provide a very tax-efficient savings vehicle for parents, family members and friends to invest up to £3,600 in this tax year on behalf of a child. Similarly, you could consider setting up a pension plan for a child or grandchild and making a net payment of £2,880 (£3,600 after basic rate Income Tax relief).
Have you used your annual Capital Gains Tax exemption?
The annual exemption from Capital Gains Tax (CGT) is £10,600 per individual. For those above the basic rate limit, paying tax at 28%, this exemption is worth £2,968 (£5,396 per couple). You should consider crystallising gains up to this limit.
Have you considered Venture Capital Trusts (VCT) or Enterprise Investment Schemes (EIS) to reduce your Income Tax liability or defer Capital Gains Tax?
Investing now into a VCT will provide Income Tax relief at 30% that can be set against an Income Tax liability for 2012/13. Similarly, an Enterprise Investment Scheme (EIS) will provide Income Tax relief at 30% that can be set against Income Tax of up to £1 million, with no limit for Capital Gains Tax deferral relief or business property relief. The allowance can be backdated for 1 year. This will be the last chance to claim the 2011/12 allowance.
All VCT and EIS must invest in unquoted UK smaller companies and such companies, by their nature, involve a higher degree of risk than investment in larger companies. As such there is a risk that any of the investments may not perform as hoped and in some circumstances may fail completely. Also, due to the nature of underlying assets, VCT and EIS are fairly illiquid and such investors must be aware they may have difficulty, or be unable to realise their shares at levels close to that which reflect the value of the underlying assets. Therefore, this type of investment should not be considered unless you are willing to accept a higher level of risk.
Do you run your own company with a tax year-end of 31 March?
With around 40% of limited companies having their corporate tax year-end on 31 March 2013, there are some excellent opportunities to reduce the liability to Corporation Tax by making a significant pension contribution now.
Unlike the position for personal contributions, contributions made by employers are not limited to 100% of relevant UK earnings. In addition, carry forward can be used for employer contributions as well as personal contributions.
Have you considered pension contributions to reduce the Child Benefit
From January this year, a parent with an income over £50,000 will suffer a tax charge on his/her Child Benefit. HMRC estimates that 1.2m families will be affected by these new rules. The benefit will be totally removed for those whose income exceeds £60,000.
Could you make sufficient pension contributions to reduce your ‘adjusted net income’ below £50,000 and reclaim Child Benefit?
Don’t leave it too late to take action. Please contact your St. James’s Place Partner for more information.
The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependant on individual circumstances. The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.