Legitimate tax planning – including using reliefs and allowances in the way that Parliament intended when introducing them – is entirely unaffected by HMRC’s clampdown on tax avoidance. With the end of another tax year on 5 April in sight, here are some ways taxpayers can legally manage their tax liabilities.
Personal allowances
• Ensure both spouses’/civil partners’ allowances are utilised:
- if a spouse/civil partner has insufficient income to utilise the full £11,000 personal allowance for 2016/17, consider transferring income yielding assets, to use up both personal allowances
- if neither partner pays tax at 40 per cent or 45 per cent, one can transfer up to 10 per cent of their personal allowance to the other, saving tax of up to £220.
• Reduce income to below £100,000/£150,000 thresholds: as the personal allowance is reduced by £1 for every £2 of net income over £100,000, the effective top rate for income between £100,001 and £122,000 is 60 per cent.
The top rate for income over £150,000 is 45 per cent. Individuals with incomes near these thresholds can reduce their tax liabilities by reducing their taxable income below £100,000 or £150,000. This can be done by changing income into non-taxable forms, deferring income, making pension contributions, making payments to charity or giving income yielding assets to a spouse/civil partner with lower income.
Investment income
• Receive dividends and interest tax free:
- The first £5,000 of dividend income is tax-free, so taxpayers with larger investment portfolios and business owner-managers should ensure that they take advantage of this allowance
- The personal savings allowance (£1,500 for basic rate taxpayers; £500 for 40 per cent taxpayers; £0 for 45 per cent taxpayers) also allows interest of up to those amounts to be received tax free.
• Increase tax-free Isa savings: the overall annual investment limit for standard Isas and lifetime Isas is increased to £20,000 for 2017/18, and the separate annual limit for Junior Isas is increased to £4,128.
Employment earnings
• Exchange salary for benefits: although it is proposed to limit the scope for exchanging taxable salary for non-taxable benefits for new arrangements from 6 April 2017 and for existing arrangements from 6 April 2018, it will still be possible to save tax and NICs by exchanging salary for the following types of benefit:
- Pensions and pensions advice
- Childcare
- Cycle to work schemes
- Company cars with CO2 ratings below 75 g/km
- Life assurance.
• Switch your company car: Choose a lower emissions car to save tax. If fuel has been provided for private use, consider whether fully reimbursing the cost to the company would be cheaper than paying the fuel scale charge, which is based on the car’s CO2 emissions.
Pensions
The first basic point is to ensure that the annual allowance (AA) for tax-deductible contributions (up to £40,000 for 2016/17, plus any unused amounts from the previous three tax years) have been fully utilised, where possible.
The AA is reduced by £1 for every £2 of an individual’s ‘adjusted income’ of over £150,000 if their ‘threshold income’ is over £110,000, down to a minimum AA of £10,000.
A particular deadline that taxpayers with pension funds of over £1.25m on 5 April 2014 should not miss is the 5 April 2017 deadline to claim ‘Individual Protection 2014’, which will protect those funds, up to a maximum of £1.5m, from a tax charge.
