19 February 2018

Tax year end planning

With the end of January tax return deadline having now passed the next significant date in the tax calendar is 5 April, end of the current 2017/18 tax year

With this in mind, part of the tax payment that many will have made on 31 January will have been the first payment to account of their 2017/18 income tax liability and so this is a good time to consider making the most of the available allowances and tax relief before 5 April.

Income tax

  • The personal allowance for 2017/18 is £11,500; with the next £33,500 of income taxed at 20% (though for Scottish taxpayers this band reduces to £31,500 on earned income); the 40% higher rate charged thereafter up to an income limit of £150,000; and the 45% additional value charged on income over and above that.
  • With the personal allowance reducing by £1 for every £2 income above £100,000 (meaning the personal allowance is lost once income exceeds £123,000), those taxpayers whose income levels are within that banding should consider making a pension contribution to bring their income below £100,000, which will see them benefit by an effective 60% rate of tax relief.
  • The dividend allowance currently relieves the first £5,000 of dividends from tax.  That dividend allowance is to reduce to £2,000 from 6 April 2018 and so those who can control the amounts of dividends they receive should ensure they make full use of the higher allowance due for this current tax year.
  • Child Benefit gets withdrawn by 1% for every £100 of tax highest earning spouse’s income in the household over £50,000 and so where income falls within the £50,000 to £60,000 band, consideration should be given to making a pension contribution to reduce income below £50,000.

Capital gains tax

  • The Capital Gains Tax £11,300 annual allowance can’t be carried forward to future tax years or transferred and so do consider whether any disposal of assets in prospect should be made before 5 April to ensure the allowance isn’t lost.
  • Each spouse has their own annual allowance and so assets can be transferred between them to make full use of both allowances.

Inheritance tax

  • The annual gift exemption is £3,000; and last year’s exemption can be carried forward if not used, meaning a total of £6,000 could be gifted before 5 April.
  • The small gifts exemption is often overlooked: up to £250 can be gifted to as many people as you wish during each tax year.
  • Those who have an annual income that normally exceeds their expenditure can gift the excess without risk of it ever being liable to Inheritance Tax, provided there is a regular pattern of gifting and appropriate documentation is maintained to evidence how the excess has been calculated.
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