This coming Friday on Money Talk Simon will be looking at the the ins and outs of Year End Tax Planning. As the end of financial year looms (April 5th), it is worth investigating whether or not you are making the most out of your money. Some of the items that will be discussed include…
Gov.uk defines Capital Gains Tax as… ‘a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.
In 2015/16 the first £11,100 of gain is free of tax. Gains exceeding this area of exemption will be taxed at 18% up until £31,875, and exceeding this, will be taxed at 28%.
There are some ‘gains’ which are tax-free, including gifts between spouses and gifts to charities. If you were to pass away, whatever you leave is also tax-free. However, it is worth noting that Inheritance Tax may be payable instead.
Tax Efficient Investments
There are some investments that have Capital Gains Tax and income tax benefits. These include (New) Individual Savings Accounts, Enterprise Investment Schemes, Seed Enterprise Investment Schemes, and Venture Capital Trusts.
New Individual Savings Accounts (commonly known as NISAs or ISAs) allow individuals to invest in one savings account and one stocks and shares account per tax year. The maximum investment is £15,240 in 2015/16 and is due to remain the same in 2016/17. ISAs are free of UK tax on capital gains and income and offer a wide variety of investments.
Enterprise Investment Schemes (also known as EIS – we love our acronyms in finance!) are a series of UK tax relief’s is designed to encourage investment in small unquoted companies conducting qualifying trade in the UK.
Seed Enterprise Investment Scheme (SEIS) gives the opportunity for individuals to get up to 50% income tax relief on up to £100,000 per financial year on investments in start-up companies. This scheme was created in 2012 to encourage investors to finance new businesses by providing tax breaks for projects they may otherwise view as too risky.
Venture Capital Trusts (VCTs) again offers the opportunity to invest in small businesses. VCTs offer income tax relief of 30% on investments up to £200,000 each tax year, tax-free dividends, and no Capital Gains Tax. It is worth noting however, that both VCTs, EIS and SEIS are all considered high-risk investments.
If you are currently looking into the payment of bonuses to directors, consider carefully whether these should be made before or after the end of the tax year. This is because the date of payment will have a knock-on effect on the date tax is due and potentially the rate at which it is due.
Watchful preparation leading up to the 5th of April 2016 may be particularly useful for individuals with high incomes. Income over £150,000 is taxed at 45%. You might be able to avoid this additional rate by delaying a bonus until 2016/17 if your income will fall below £150,000 in that year. If your income is less than £150,000 this year but is expected to exceed that figure next year, you could bring forward income into 2015/16 to avoid the additional rate next year.
Contributing towards your pension is a worthy cause for many reasons. In relation to tax planning it is very much worth considering because of the tax privileges that come hand-in-hand with UK pension plans. Tax relief on pension contributions is at least 20%, and if you are a higher or additional rate taxpayer you will get tax relief at 40% or 45%. Restricting your contributions to amounts that qualify for at least 40% tax relief will be of the greatest benefit..
We would always recommend seeking the advice of an independent financial adviser (such as Facts & Figures) before making any significant financial moves.