Personal tax planning
Personal allowances and reliefs
The personal allowance for the current tax year is £11,500. Non-savings income above the personal allowance is taxed at rates from 20% to 45%.
A higher marginal tax rate may be payable between £100,000 and £123,000 when the personal allowance is gradually withdrawn. This gives an effective marginal rate of 60% in this band for non-savings and savings income.
You may be able to transfer £1,150 of your personal allowance to your spouse or civil partner if neither of you is a higher rate taxpayer. Generally speaking, it is relevant when one spouse or civil partner is not able to use all of their personal allowance.
Tax on savings
The personal savings allowance allows basic rate tax payer to receive up to £1,000 of savings income tax-free, while a higher rate taxpayer can get up to £500 of savings income, without any tax being due. There is no relief for an additional rate (45%) taxpayer.
This is the last year that the £5,000 tax-free dividend allowance (a band in which dividends are taxed at 0%) is available. From 6 April 2018 the dividend allowance reduces to £2,000.
Things to consider:
- is everyone in your family taking full advantage of their personal allowance? If not, then consider the transferable marriage allowance.
- are there opportunities to utilise any unused allowances this tax year?
- what can you do to take advantage of marginal tax rates and reduce the slice taxable at a higher rate?
- would it be possible to consider the tax-free alternatives instead of a bonus or a salary increase?
- is your dividend strategy as tax-efficient as it could be?
- could you take advantage of the rent a room relief which, for individuals, is £7,500 or £3,750 for joint owners?
Capital gains tax
Ordinarily, each person is entitled to make a tax-free gain up to £11,300 (or up to £5,650 for trusts). Married couples and civil partners, therefore, each have their own £11,300 exemption. After this gains are usually taxed at a rate that is income-dependent.
Where taxable income is less than £33,501 (£31,501 in Scotland) the capital gains tax rate for gains up to the spare basic rate band allowance is 10%. After this it rises to 20%. The standard rate applicable to a trust is 20%.
A higher rate of capital gains tax applies to residential property and carried interest which are taxed at a rate of 18% and 28%. The rate applicable to disposals of similar assets by trustees is 28%.
For business owners, entrepreneurs' relief gives rise to a lower rate of 10% for qualifying gains. The maximum reduction in tax is £1 million.
Things to consider:
- have you used your annual exemption of £11,300?
- what tax can be saved by maximising the advantage of family member tax-free exemptions?
- should an asset that is going to be sold in the future be transferred into joint names?
- if a gain is going to be realised, are there other assets which are standing at a capital loss that can be used to reduce your gains?
- if tax is due, are there ways of deferring or rolling over the gain?
- if you have substantial assets outside of an ISA could you arrange them to generate a tax-free income?
- have you reviewed your buy-to-let portfolio to explore how you can reduce your tax liability from property income?
- would it be beneficial to incorporate buy-to-let properties into a company?
- if you have two properties you have used as a home, have you considered if your main residence election is on the property with the largest gain?
Generally, inheritance tax (IHT) is due on death at a rate of 40% if the inheritance threshold of £325,000 is exceeded.
From 6 April 2017 there is a £100,000 residence nil-rate band that is available subject to certain conditions. These include leaving the home, or share of one to direct descendants such as children or grandchildren. This residence band will rise annually until April 2020 when it reaches £175,000. This means the individual available nil-rate band reaches a maximum of £500,000 or £1 million for married couples or civil partners.
The percentage of any unused nil-rate band from the first death may be transferred to the surviving spouse, allowing up to double the nil-rate band applicable at the date of the second death.
Gifts or transfers made within seven years of death are also added back into the estate and are liable to IHT, but may be subject to some exemptions as well as a tapered reduction for tax on transfers between years three and seven.
Things to consider:
- do you have an up-to-date will that reflects your wishes and are you happy with the choice of executors?
- are you taking advantage of exemptions such as the annual £3,000 exemption, gifts out of income, and gifts on marriage or civil partnership?
- should you consider using a discounted gift trust which allows the gifting of a lump sum into a trust while retaining income for life?
- do you have surplus assets that you can give away and reduce the value of your estate that is chargeable to IHT?
- should you consider altering the spread of your investment portfolio into more IHT-efficient products?
There are limits to how much can be invested in a pension scheme before a tax charge is payable. To qualify for personal tax relief, a pension contribution must be made by or on behalf of a relevant UK individual.
Tax relief for pension contributions may be restricted by reference to net relevant earnings and the annual allowance.
The annual allowance is currently £40,000 per year for those with income of less than £150,000. There is a minimum annual allowance of £10,000 per year, in most cases, for individuals with annual income of £210,000 or more.
Complex rules also apply to individuals with ‘threshold income’ above £110,000 and, therefore, seeking pension advice is important. Provided you had a pension fund during the previous 3 years it is possible to carry forward any unused allowances.
There is a lifetime allowance which is currently £1 million. Funds which are over this value when benefits are accessed can be liable to a tax charge.
If you are over 55, you may be able to start taking pension drawdown, even if you are still working. However, defined benefit schemes are likely to have restrictions and possibly costs if the pension is taken early.
Other things to think about include:
- when are you planning to retire and what’s your ideal income?
- should you increase your pension contributions?
- when considering if you have exceeded the annual allowance have you reviewed both your employee and employer pension contributions?
- have you fully considered the potential inheritance tax benefits of maximising your pension fund?
Individuals who are 18 or over can invest up to £20,000 in an ISA. Growth, income and withdrawals from an ISA are free of income and capital gains tax, but the value of an ISA will form part of your estate for inheritance tax purposes.
A Junior ISA of up to £4,128 is available for those who are 17 or under.
ISAs are normally readily accessible (subject to scheme rules).
It is also possible, as part of the £20,000 ISA allowance, to invest £4,000 in a Lifetime ISA which receives an annual government bonus of up to 25% of your savings. The funds can be used on the purchase of the first home, or used for retirement. There are further scheme rules and early withdrawal penalties. You must be over 18 but under 40 to open a Lifetime ISA.
Help to Buy ISAs allow individuals over the age of 16 to save up to £200 a month towards their first home. Buyers can also deposit a lump sum of up to £1,000 when they set up their account. The money will earn interest and will also qualify for a 25% bonus (up to £3,000) from the government, provided the funds are used to buy a home.
Things to consider:
- if you don't already have an ISA, should you start one this tax year?
- should you use the maximum tax-free investment allowance?
Individuals on low incomes may be eligible to claim tax credits or the universal credit (existing claimants will move to universal credit by the end of March 2022).
The calculations for these benefits involve determining 3 figures: your maximum benefit, your net income and your allowance.
The maximum benefit is the amount you would receive if you had no income at all. As some income is disregarded, it is possible that someone could receive the maximum benefit even if they had a small income.
Net income is usually earnings after tax, national insurance and pension contributions. A notional income may be added if you have capital above a certain threshold.
The allowances are the maximum amount of income you may earn and still receive the maximum benefit. If your income is above this figure, a percentage of the excess is deducted from the maximum benefit.
Check to see if you qualify for these benefits as they can sometimes be payable for people with fairly high incomes.
As capital can be treated as income that reduces benefit, it may be sensible to give away funds or to spend them upgrading your property (as property value is not regarded as capital).
However, there are rules to counter blatant examples of capital reduction.
Non-UK domicile taxation
From 6 April 2017 non-domiciled individuals are deemed UK domiciled for tax purposes if they have been a UK resident for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin.
Inheritance tax is charged on UK residential property when this is held indirectly by a non-domiciled individual through an offshore structure. This, for example, might be where the property is held in a trust or a company.
Read about year-end planning for businesses.