As we approach the end of the tax year then we should remind ourselves of some simple ways of reducing the amount of tax payable. This is particularly important following the recent changes to Child Benefit income qualifications.
1. If you have made a large Capital Gain during the year, and are sitting on a potential loss making asset, then you should consider realising that loss so that it can be used to reduce your taxable gain. You must, however, always consider any other costs involved.
2. Similarly, if you are sitting on gains on shares that are within the annual exemption then you could “bed and spouse” or “bed and ISA” that asset. This means that you sell the shares which are then bought by your spouse or an ISA, thus avoiding the “Bed and Breakfasting” rules.
3. Which brings us to ISAs. This year each individual can invest up to £11,280 into an ISA. Of this, up to £5,640 can be invested in a “Cash ISA”, the balance of the investment being into a “Stocks and Shares ISA”. Whilst there is no tax relief on the actual investment, unlike contributions into a pension scheme, and income of capital gain made within the ISA is tax free.
4. Contributing into a Personal Pension attracts immediate tax relief. The amount that can attract tax relief is the higher of £3,600 or your total income subject to an annual limit of £50,000. Basic Rate taxpayers receive immediate tax relief at source, ie they will pay exactly the same amount of tax but instead will receive an investment of £100 at a cost of only £80 so the tax relief is, to an extent, “hidden”. Higher Rate taxpayers will receive the additional tax relief by means of a reduction in their tax bill.
5. Partners within a marriage or civil partnership can transfer assets between themselves to ensure that income is split between them in the most tax advantageous manner. For instance, they could transfer savings accounts, shares and property between themselves to ensure that interest dividends and rental income is received by the partner paying tax at the lowest marginal rate. As always, however, you should always consider any additional costs involved.
6. If you are in business and are both married to a non-working partner and also paying tax at higher rate then a more adventurous tax saving scheme is to bring your spouse into partnership. Profits can then be divided between yourselves in such a way as to minimise or eliminate the higher rate tax charge. However, you should seek advice before attempting this as there are other factors that must be considered.
As always, seek professional advice before taking any action as individual circumstances vary significantly.