Taxpayers need get their financial affairs in order before the start of the new tax year on 6 April, but navigating through the UK’s personal tax system can be quite a challenge.
Nimesh Shah, partner at Blick Rothenberg, said, 'The UK has a very complex personal tax system, resulting from constant political tinkering. This can sometimes lead to frustration and confusion, particularly when taxpayers try to navigate through the layers of provisions that impact everyday situations.
'The end of the tax year is a natural opportunity to renew the call for a simpler, more efficient tax system. It is also good time to explore the many opportunities available to taxpayers to improve their position for the current tax year, but individuals will need to action these before 6 April 2018 to avoid missing out.'
Commenting on the recent self-assessment tax return deadline, Nimesh warned, 'HM Revenue & Customs ("HMRC") reported that almost 750,000 people missed the 31 January deadline for filing their tax return, resulting in automatic penalties and interest. Those who still have an outstanding tax liability from the 2016/17 tax year need to act fast and make sure that this is paid before 2 March 2018. Failure to do so and HMRC will apply a 5% surcharge on the underpayment, in addition to the normal interest rates and any late filing penalties.'
Approaching the last full month of the 2017/18 tax year, Blick Rothenberg has produced the following checklist of tax savvy moves:
- Your personal allowance (£11,500 in 2017/18) is phased out if your income is between £100,000 and £123,000 (2017/18) resulting in an effective rate of tax of 60% on your earnings within this range. If your income is within this range, it is worth considering making pension contributions or charitable donations to reduce the impact of losing your personal allowance. (Suzanne Briggs, director)
- If a spouse or civil partner does not have sufficient income to utilise their personal allowance or their basic rate and higher rate tax bands (20% on income up to £33,500 and 40% on income between £33,500 and £150,000), the higher earning spouse or civil partner could gift income producing assets to them without incurring in a Capital Gains Tax charge. (Suzanne Briggs, director)
- Married couples could consider whether a jointly owned asset may be held more effectively for income tax purposes. For example, a let property, but before taking action, you need to check the Stamp Duty Land Tax ("SDLT") position if there are mortgages. (Susan Spash, partner)
- Make use of your pension annual allowance and unused pension relief from previous years which can give you tax relief on your income. Unused pension relief carries forward for three years, but then falls away, so if you don’t use it, you will lose it. The use of pension contributions is particularly beneficial when earnings fall within the effective 60% tax band. (Genevieve Moore, partner)
- Any UK resident can contribute up to £2,880 (net) into a pension, irrespective of their earnings, and the pension provider is able to obtain 20% tax relief, so the policy is credited with a gross contribution of £3,600. Therefore, consider contributing to a pension for a non-working spouse/civil partner or children to benefit from £720 tax relief for each person. (Suzanne Briggs, director)
- Don’t exceed your maximum allowable pension contributions for the year as there will be a tax charge, and remember that both your own and your employer’s pension contributions count towards your tax free pension allowance. The maximum is currently set at £40,000 a year, but high earners get a tapered annual pension allowance if their income is over £150,000 (Paul Haywood-Schiefer, assistant manager)
Capital Gains Tax ("CGT")
Property and mortgages
- If you have the ability and flexibility, consider realising capital gains before the end of the tax year in order to utilise your annual exempt amount (£11,300 in 2017/18). If you do not use the annual exemption it cannot be carried forward and is lost. Consider also gifting assets to your spouse or civil partner so that they are able to utilise their CGT annual exemption of £11,300. (Genevieve Moore, partner)
- If you have sold any assets and realised a loss, make sure you claim the loss on your tax return. If you don’t claim the loss within four years, you can’t then claim it subsequently. Therefore, capital losses for the tax year 2013/14 not previously claimed should be claimed by 5 April 2018. (Nimesh Shah, partner)
- Review mortgages on let property due to the reduction in tax deductibility of interest that started from 6 April 2017 – possibly seek replacement debt with better interest terms. From 6 April 2018, only 50% of the mortgage interest will be allowable as a cost and the other 50% will only get basic rate tax relief. (Susan Spash, partner)
Inheritance Tax ("IHT")
- Every person in the UK can make gifts of up to £3,000 in total each year without any UK IHT implications. If the £3,000 exemption was unused in the previous tax year, the exemption can be carried forward so the maximum available exemption can be up to £6,000. (Suzanne Briggs, director)
- Other exemptions from IHT for gifts are available, for example for small gifts of up to £250 to any number of people and gifts in consideration of marriage of up to £5,000 by a parent. (Suzanne Briggs, director)
- Regular gifts out of a person’s surplus income are not subject to IHT, so setting a pattern of gifts to an individual can remove these from a person’s estate. The amount gifted is only restricted in that it should be from surplus income and you must be able to maintain your standard of living after you have made the gifts. (Paul Haywood-Schiefer, assistant manager)
- Make full use of the Individual Savings Account ("ISA") allowance, which for 2017/18 is £20,000, and junior ISAs, which is £4,128 for children under the age of 18. The annual ISA limit can be split between cash and permitted investments, such as stocks and shares. (Suzanne Briggs, director)
- Consider the new Lifetime ISA ("LISA"). UK residents between 18-40 years old can set one up and begin contributing up to a maximum of £4,000 per year. This counts towards the total ISA allowance of £20,000 and individuals can contribute until they reach 50. Income and gains within the LISA will be tax free and the government will top it up with a bonus of 25% of the money contributed per year, up to a maximum of £1,000. But be wary of the penalties when withdrawing funds, otherwise you could be penalised with a tax charge of 25% of the amount withdrawn. (Paul Haywood-Schiefer, assistant manager)
Investments and dividends
- People with a bit more cash to splash could consider making SEIS, EIS or VCT investments for income tax relief on the value of the amount invested and capital gains tax deferral reliefs. (Genevieve Moore, Partner)
- Each individual has a dividend allowance of £5,000 until 6 April 2018 when it will reduce to £2,000. It is worth considering transferring shares to a spouse or civil partner if they have not used their own dividend allowance. (Suzanne Briggs, director)
- If you are a shareholder, consider declaring a dividend from your company before the end of the tax year to utilise your dividend allowance. (Genevieve Moore, partner)
For more information, please contact firstname.lastname@example.org.