With the personal tax year ending on 5 April 2018, what actions should I be considering to minimise personal tax liabilities?

BLOG6th Feb 2018

1. Consider reducing your taxable income below £100,000 or £150,000

Normally, taxable income below £150,000 is taxed at 40%. However, if your taxable income is between £100,001 and £123,000, your personal annual income tax free allowance of £11,500 reduces by £1 for every £2 of net income over £100,000, giving an effective top rate of 60% for taxable income between up to £123,000 where the personal allowance will be extinguished.

If your taxable income exceeds £150,000, you are taxed on the excess at 45%.

Consider these ways of reducing your tax liabilities:

  • making personal pension contributions
  • giving to charity
  • moving income producing assets to a spouse with lower taxable income
  • managing the timing of dividends and other investment income
  • salary exchange – see below
  1. Capital gains are best

Income is taxed at a maximum of 45% as opposed to a maximum of 20% for all capital gains other than capital gains on residential property and carried interest which are taxed at a maximum of 28%.

Consider converting your investments into ones that produce a capital gain rather than income.

  1. Salary exchange

Salary exchange involves employees sacrificing a cash payment for a tax free alternative such as:

  • an employer pension contribution
  • childcare vouchers
  • cycle to work scheme

If you earn over £100,000, you could, for example, sacrifice some salary for an employer pension contribution. This could take you below the £100,000 threshold maintaining all of your personal annual income tax free allowance as well as saving employer’s national insurance since no NIC is payable on employer pension contributions.

  1. Consider choosing a lower emission company car to save tax or consider using your own car for business travel

The government is incentivising individuals to choose lower CO2 emission company cars by increasing the taxable benefit percentage each year for company cars.

For example, a petrol car with Co2 emissions of 150 g/km currently gives rise to a taxable car benefit of 29% of the list price. In 2018/19 this will rise to 31%. Income tax is payable on this at your marginal rate of tax (20%, 40% or 45%) depending upon your other income. From 6 April, the normal 3% supplement for diesel cars will increase to 4 up to a maximum 37% however, in the Autumn Budget 2017, the Chancellor announced some changes to the diesel supplement where diesel cars that meet the Real Driving Emissions 2 standard (legislated as NOx <80mg/km) will be exempt from the supplement.

In addition, there is also taxable car fuel benefit if you are provided with fuel by your employer. For 2017/18, this is calculated by applying the Co2 based car benefit percentage to the car fuel benefit charge multiplier of £22,600, increasing to £23,400 in 2018/19.

If the employee pays for the full cost of all fuel for private journeys (usually including home to work) there will be no car fuel benefit. In all other cases the full tax charge will be due.

  1. Ways to retain child benefit

If your or your partner’s taxable income exceeds £50,000, child benefit is clawed back at 1% of the benefit for every £100 of income over £50,000. Therefore, when taxable income reaches £60,000, the entire child benefit is lost.

If both you and your partner can reduce your annual taxable income below £50,000, the full child benefit will be retained.

This may be achieved via salary exchange as discussed in section 3 above.

You could also consider allocating trading profits, dividends or investment income to ensure both you and your partner remain under the £50,000 threshold.

  1. Investing in an Enterprise Investment Scheme (“EIS”) or SEED EIS Scheme

If you invest in an EIS qualifying company, you can obtain income tax relief at 30% of the investment, up to a maximum investment of £1 million.

If you invest in a SEED EIS qualifying company, you can obtain income tax relief at 50% (even if your effective tax rate is less than 50%) of the investment, up to a maximum investment of £100,000.

For both EIS and SEED EIS schemes, you can also carry back 100% of an investment made into the previous tax year. Therefore an investment in 2017/18 can be carried back to reduce the tax liability for 2016/17.

There are also capital gains advantages when investing in EIS and SEED EIS schemes such that, if the investor receives income tax relief on the original subscription of the shares, and the shares are disposed of after they have been held for three years, the investor’s entire gain is free from capital gains tax.

If the shares are disposed of at a loss, the investor can elect that the amount of the loss, less any income tax relief given, can be relieved against income tax instead of being set off against any capital gains to obtain a higher rate of tax relief.

The tax due on capital gains made within the period three years before or one year after an EIS investment can be deferred and reinvestment relief is available for SEED EIS investments.

Please note: The investment risk associated with EIS and SEED EIS investments vary considerably and specialist investment and tax advice should be sought before investing. If you would like to discuss investing in an EIS or SEED EIS Scheme, please contact Ian Campbell at AAB Wealth.

  1. Investing in Venture Capital Trusts (“VCTs”)

If you invest in VCT units, you can obtain income tax relief at 30% of the investment up to a maximum of £200,000 for 2017/18.

Dividends received from the investment are tax free and no CGT is payable on any gain when you sell the VCT units.

In addition, the VCT pays no CGT on any units that it buys and sells.

Please note: The investment risk associated with VCTs vary considerably and specialist investment and tax advice should be sought before investing. If you would like to discuss investing in a VDT, please contact Ian Campbell at AAB Wealth.

  1. Carrying back trading losses

Sole traders and partners who have made trade losses can offset these amounts against other income of the same tax year and/or the previous tax year. The maximum loss available for set-off is £50,000 or 25% of your total income, if higher.

If the losses are in the first four years of trading, they can be carried back to the three previous tax years, with the earliest tax year obtaining relief first. Again, this is subject to the limits of £50,000 or 25% of total income, if higher.

If you have started a new business and incurred a loss, make sure that you maximise the tax relief available by making the right loss claim.

  1. Setting losses on unquoted shares against other income

If you sell shares which you originally subscribed for in an unquoted trading company at a loss, you can claim the loss against your taxable income in preference to capital gains to maintain tax relief.

The loss could also be carried back to the previous tax year. The maximum loss available for set-off is £50,000 or 25% of your total income, if higher.

Please note: There are various conditions that must be met in order to allow for income tax relief and specialist advice should be sought.

  1. Setting paper losses on unquoted shares against taxable gains

If you own shares which have become worthless or of negligible value, you can claim a loss (effectively the price you originally paid for the shares) that can be set off against other taxable gains made in 2017/18. Negligible value claims on unquoted shares can also be set against income as set out within point 9 above.

  1. Deferring capital gains

If you sold an asset used in a business for a gain during 2016/17, you can defer paying CGT on the gain by buying another qualifying business asset within one year before or three years after the disposal. Qualifying assets for rollover relief include land & buildings, fixed plant & machinery and goodwill.

  1. Making charitable donations

You can make qualifying charitable donations and claim higher rate tax relief on these.

You can also give stock market listed shares to charity and obtain income tax relief and avoid paying CGT.

However, if the market value of the shares is less than their allowable cost, you may want to sell the shares first to enable you to claim a capital loss which can be set against other gains and then donate the proceeds to the charity claiming income tax relief.

  1. Utilising unused pension contribution allowances

There is a currently an annual pension contribution limit for an individual of £40,000. This means that the total gross personal pension contributions made by an individual and their employer are limited to £40,000.

If an individual’s total annual pension contributions (employer + employee) exceed the annual allowance, income tax applies to the excess at the employee’s marginal rate of tax (known as the annual allowance charge).

If the employee has paid less than the current annual allowance in the three years before 6 April 2018, and was part of a registered pension scheme for those years, they will be able to carry forward the unused relief to allow higher contributions in 2018/19.

A tapered annual allowance applies to high earners. In very broad terms, if your income and employer pension contributions (including salary sacrifice schemes) exceed £110,000, you may be subject to the tapered allowance. These restrictions can reduce the annual pension allowance to a minimum of £10,000.

Please note: The rules are complex and advice should be taken from a member of AAB Wealth or an appropriately qualified financial planner.

Pension lifetime allowance protection

The lifetime allowance is the maximum amount of pension savings an individual can build up over their life that benefit from tax relief. If your pension pot exceeds the lifetime allowance then tax charges (the lifetime allowance charge) apply on the excess.

The lifetime allowance is currently £1 million, increasing to £1.03 million on 6 April 2018. There are various options to claim ‘protection’ for existing pension savings. The rules are complex and advice should be taken from a member of AAB Wealth or an appropriately qualified financial planner.

  1. Pension contributions on behalf of others

All UK resident individuals, including children, are entitled to make pension contributions under the stakeholder pension regime up to £2,880 net (£3,600 gross).

If parents have lost child benefit because one or both parents’ taxable income is more than £50,000, then grandparents could consider making pension contributions on their behalf to reduce the parents’ taxable income below £50,000 and thus allowing child benefit to be retained.

You could also consider making pension contributions on behalf of your own children. Although, no income tax relief will be available for the children (unless they have income over the personal allowance), this will build up their pension pot earlier than waiting until they enter full time employment.

  1. Capital gains annual exemptions and capital losses

An individual does not pay CGT on gains below £11,300 per annum because of a CGT annual exemption, also available to children. Unused annual exemptions however cannot be carried forward.

Since married couples and civil partners are able to transfer assets between them without incurring CGT, consideration should be given to transferring assets between them to ensure that they utilise both their annual exemptions when selling taxable assets.

Where one spouse or civil partner is a higher rate tax payer, transfers should also be considered to ensure that some or all of the gain is liable at 10% rather than all at 20%. (18% rather than 28% for gains made on residential properties and carried interests).

Since capital losses which arise in a year are deducted from any gains in that year before deducting the CGT annual exemption, crystallising a loss that wastes the annual exemption should be avoided.

Unused losses are carried forward indefinitely to set off against future gains so, if you know that you will be a higher rate tax payer in 2018/19 but a lower rate tax payer in 2017/18, you should consider delaying the sale of assets standing at a loss until 2018/19 so that you obtain tax relief at 20% rather than 10% (28% rather than 18% for gains made on residential properties and carried interests).

  1. Making gifts

Inheritance tax (“IHT”) is payable on the chargeable value of your estate above £325,000.

One way to reduce the chargeable value of your estate and reduce the IHT liability is giving assets to family members however IHT may also be chargeable on any gifts you make if you die within seven years of the gift. Care needs to be taken when gifting assets to ensure a capital gains tax liability is not triggered.

In any one tax year you are allowed to give without any IHT consequences:

  • up to £3,000 worth of gifts (with the option to carry forward £3,000 of unused relief for 1 year)
  • up to £5,000 to your children when they get married
  • up to £250 of small gifts to as many people as you wish
  • gifts “out of surplus income” – advice should always be sought.
  1. ISAs

Income and capital gains from ISAs are tax free and you can withdraw from an ISA without tax consequences.

There are two types of ISA investment:

  1. Stocks and shares ISA: this gives you the chance to invest your money in equities, bonds or commercial property without paying personal tax on any returns you might make.
  2. Cash ISA: this is like a normal deposit account – except that you pay no tax on the interest you earn.

The ISA limit for 2017/18 is £20,000 and will remain at £20,000 from 6 April 2018.

The annual ISA allowance is for every eligible adult. This means a husband and wife, for example, could put up to £40,000 between them into ISAs this tax year.

The chart below shows examples of how you can split your ISA investments.

You can invest in ISA Allowance (18/19 tax year) Circumstances
Junior ISA up to £4,260 this tax year You can invest up to the annual limit between a cash Junior ISA and/or a Junior stocks and shares ISA.
Cash ISA up to £20,000 this tax year You can invest up to £20,000 in a cash ISA.
Cash ISA and Stocks and Shares ISAs up to £20,000 this tax year You can invest up to £20,000 in a cash ISA or a stocks and shares ISA or a combination of both.
Stocks and Shares ISAs up to £20,000 this tax year You can invest all of your ISA allowance in a stocks and shares ISA.
  1. LISAs

The Lifetime ISA, available from 6 April 2017, allows savers aged between 18 and 39 to invest up to £4,000 per annum, with the state adding a 25% bonus to annual savings. The LISA comes with a dual purpose – the money can be put towards a first home (up to the value of £450,000), or it can be used for retirement.

A 25% withdrawal penalty applies if you cash in the LISA before the age of 60 and don’t use the cash to buy a first property – although the Government has said this won’t be the case in the first year of the scheme up to 5 April 2018.

If you do decide to close your LISA before 6 April 2017, be aware that you won’t receive any bonus as –the 25% bonus will be paid at the end of the tax year. It will however be paid monthly from April 2018.

For more information, please contact Derek Mitchell (derek.mitchell@aab.uk) or your usual AAB contact.