We are rapidly approaching the end of the tax year and it is now time for clients to check that they have carried out their year end tax audit and used the reliefs and exemptions that would otherwise be lost.
As you plan to secure your financial future it is important you take action to avoid missing out on valuable tax savings and allowances that expire after 5th April.
Here is my year-end tax allowance audit that every client should follow:
Use your ISA allowance - If you are aged over 18 and a UK resident, you can invest up to £15,240 in the current tax year. The allowance will rise to £20,000 in the next tax year, but any unused allowance from this tax year will be lost.
Make a pension contribution - Pension contributions are still the most tax-efficient way to save for retirement. Contributions into a UK-registered pension trust attract tax relief on the way grow free of capital gain tax within the fund. Pension savings are free from Inheritance Tax, making them an effective way to pass wealth to the next generation. To maximise these benefits, you should always try to utilise your pension allowance for this tax year and then look at any unused allowances from the three previous tax years. If your 2016/17 allowance is fully utilised, you should review whether you have any unused allowance from the 2013/14 tax year, which would otherwise be lost after 5 April 2017.
Every individual over 18 years of age has an annual ISA allowance. Therefore, if you have a spouse or civil partner, you could both maximise your ISA allowances to fully utilise the combined allowance of £30,480. Furthermore, you could invest into a pension for a non-earning spouse. Each tax year, non-earners can make a £2,880 pension contribution which is grossed up to £3,600 by basic rate tax relief – even if they pay no Income Tax.
Don’t forget Children get their own allowances, why not give them a head start or plan for university fees. This tax year you can make contributions of up to £4,080 per child into a Junior ISA and £2,880 into their pension, which is grossed up to £3,600 with basic rate tax relief.
Reduce your taxable estate by considering making gifts. Inheritance tax is for many considered a voluntary tax – money which could instead stay in the family to support future generations is lost to the state by poor lifetime planning. There are two things that you should look to do, firstly prepare an income and expenditure account for the year, any surplus income can be gifted to a trust and provided that this is set up in the correct way and documented correctly, (we can help here) this is immediately outside your estate from day one You should also look to use your annual gift exemption of £3,000 for this tax year, and carry forward last year’s exemption if it hasn’t already been utilised. This money is immediately out of your estate – you don’t have to survive for another seven years, as is usually the case with other, larger gifts.
Make sure you use your annual Capital Gains Tax allowance. If you hold investments outside of a pension or ISA, you might have to pay tax on the gains when you sell them everyone gets a Capital Gains Tax (CGT) exemption of £11,100 this year. Those with larger CGT liabilities should therefore consider taking gains over two or more tax years, and/or transferring investments to a spouse or civil partner. If you both sell the assets before the end of the tax year, you can effectively double the allowance to £22,200. This is another case of ‘use it or lose it’ – if you don’t exploit the allowance in this tax year, it doesn’t roll over and is lost forever.
Business owners can use profits to supplement their pension. If you’re a business owner, money that would otherwise been paid in tax could instead boost your retirement savings. Company pension payments are deductible as a company expense and can therefore reduce or possibly wipe out liability to Corporation Tax. Contributions will need to be paid before the company’s financial year-end in order for the business to qualify for the deduction in that accounting period. A popular year-end date for many companies is 31 March. If applicable, owners of the business should try to bring forward pension contributions to before this date.
Reuse – Is it possible to extract profits from existing investments within unused allowances so that allowances not fully used each year will not go to waste. This could mean that profits build up, and when eventually taken may only benefit from a single year's allowances. For example, someone with a portfolio of unit trusts with a capital gain of £44,000 could spread the gains across four tax years and pay no tax as the all gains are within their annual CGT exemption. However, if they took them all in one go, they would only be able to use the current year's exemption and this could result in a CGT bill of £6,580 if they are a higher rate taxpayer. Effectively a higher rate taxpayer with assets subject to CGT could be storing up tax charges of £2,220 a year (£11,100 @ 20%) if they don't make use of their CGT allowance. Similarly there could be valuable income tax allowances going to waste. Potentially, up to £17,000 of savings income can be taken tax free in 2016/17. Of course this depends on what other income they may have in the tax year. The personal allowance may already have been used by other income and the savings rate band is lost for clients with earned income greater than £16,000.Clients who have little or no income this year, or can switch their investments to be held in the name of a non-taxpaying spouse or civil partner may be able to extract gains from offshore bonds tax free using their available allowances. For most clients, there is as much as £33,100 of allowances up for grabs this year. So there is plenty of potential to extract profits efficiently. But which of these, if any, are available depends upon the client's other income and what investments they hold.
For a end of year tax allowance audit please get in touch now.