Making friends with the tax year end

With the tax year end fast approaching, now is the time to make sure you are making the most of any reliefs available to you. Terri Halstead, Tax Partner, explains:  

Preparing to pay tax

The truth is that anything to do with tax is better – and often more tax efficient – with proper preparation and planning. So once last year’s tax bills have been paid, now is the time to prepare for the tax year end in April to make sure that you are getting all the tax relief you can when next year’s bill arrives. Tax relief allows you to deduct some payments you make during the tax year from your gross income, so there’s less for you to be taxed on. You can claim tax relief in addition to any personal tax allowances that you are entitled to, which essentially means you’ll take home more of your income, and pay less tax.  

Know your worth

The first thing to do is to look at what your level of income is expected to be by 5^th April. You receive tax relief, at whatever the highest rate of tax is that you pay, on any charitable donations made during the year. This can be a useful and generous way to reduce your gross income to below certain thresholds, while giving money to charity instead of the taxman. In the 2019/20 tax year, you are able to place up to 100% of your salary or £40,000 (whichever is lower) in to a pension, tax-free. Any past years Pension Contribution Allowance which has not been used up can still be carried forward, but only for the last 3 tax years. Using your pension allowance can significantly reduce the earnings you get taxed on, possibly bringing your earnings for tax purposes down into another tax bracket. And don’t forget that your pension allowances can be back dated for up to 3 years. The rules are slightly different if you earn more than £150,000. Your maximum contribution is reduced by £1 for every £2 you earn over this amount, until you hit a 'floor' of £10,000. This would be the case for anyone earning £210,000 or more.  

The chance to invest

As I’ve mentioned, there are various tax reliefs available. Let’s say you have got a very high tax rate, you might want to invest in an SEIS, EIS or VCT. SEIS and EIS provides some of the world’s best tax reliefs for investors, by allowing up to 50% of your investment to be claimed back in income tax relief and offering significant capital gains tax reductions. You will get Income Tax relief when you buy newly issued VCTs, currently at the rate of 30% on investments of up to £200,000 per tax year. This relief is provided as a tax credit to set against your total income tax liability and, therefore, cannot exceed your total tax liability for the tax year. Speaking of Capital Gains, it might be worth considering using your annual personal allowance to make some savings by, for instance, rebasing the value of your shares, thereby uplifting your base cost for a subsequent sale. So, as a simple example, if you bought shares at £100,000 and they’re now worth £112,000, by selling them and buying them back you can save tax on that extra £12,000 by using your personal allowance. If you haven’t used up all of your ISA allowance you may want to consider putting more money in, or setting up a JISA (Junior ISA). The limits are £20,000 and £4,368 respectively. It’s also worth looking into managing the timing of dividends and other investment income.  

Share the love - gifts our of surplus income

If you have spare income it may be worth making gifts out of this income to your loved ones. This means that it would not form part of your estate on death. There’s quite a bit of opportunity there but you need to be able to prove it so looking at figures as early as you can is of paramount importance.  

If you’d like to discuss any of the issues raised in this blog, please get in touch with our tax advisors.