As the end of the 2015/16 tax year approaches, now is a good time to review your tax position and take advantage of tax planning opportunities.
For 2015/16, the personal allowance is £10,600; the 20% tax rate applies to taxable income of up to £42,385; income from £42,386 to £150,000 is taxed at 40% and income above £150,000 is taxed at 45% (dividend income will be taxed at different rates – 7.5%, 32.5% and 38.1%).
If you have a limited company and are considering drawing salary, determining the best timing – before or after 5 April 2016 – may enable you to utilise your basic rate band or avoid the top tax band. Equally, with the new tax rates on dividends from 6 April 2016, it may be appropriate for some to bring forward the amount of dividends they may wish to draw.
The Annual Investment Allowance (AIA) will remain permanent at £200,000 per annum from 1 January 2016 until the life time of this parliament. The AIA provides 100% tax relief on qualifying expenditure such as new shop fit, IT equipment and fuel efficient delivery vans/cars.
There is no limit on the contributions that can be made by or on behalf of an individual into a pension scheme. The employer can make any level of contributions towards a pension. The amount of personal contributions on which tax relief can be obtained is restricted to the higher of 100% of relevant earnings and £3,600 (gross). Relief is available at the higher and additional rates of income tax but if total contributions (made by the individual, the employer and anyone else on the individual’s behalf) exceed the “annual allowance” a tax charge arises on the individual at their highest marginal rate of tax. The annual allowance is £40,000 for 2015/16 although this will be tapered downwards for higher earners in the 2016/17 tax year. The lifetime allowance is £1.25m in 2015/16 and will reduce to £1m in the 2016/17 tax year.
Tax planning for children
Each individual has a personal allowance, even minor children, so if your children have income of their own it will be tax-free up to the limit of the personal allowance (£10,600). However, income arising to a child from funds provided by the parents remains taxable on the parents, if that income exceeds £100 per parent per child per tax year. This rule does not apply to income arising from funds provided to the child by grandparents or others.
Other year-end matters
NISAs: From 1 July 2014 all ISAs has become New ISA (NISAs). No income tax is payable on any income from ISA investments. It is now possible to split your ISA allowance between cash, stocks and shares with no maximum cash component. Any child aged under 18 who lives in the UK can have a JISA. The maximum amount you can put in a Junior Isa is £4,080. If you have not already done so, therefore, you may want to consider opening an ISA before 5 April 2016 to utilise this year’s maximum allowance of £15,240.
Enterprise Investment Scheme (EIS): income tax relief is given at 30% for investment of up to £1m in shares which qualify under the EIS; the conditions for the relief are complex, both for the investor and for the issuing company. Gains made on the disposal of EIS shares are tax-free as long as various conditions are met.
Similar reliefs to the EIS are available for investment in a Venture Capital Trust (VCT).
Seed Enterprise Investment Scheme (SEIS): under this new scheme, similar to the EIS, 50% income tax relief is available on investment of up to £100,000 per tax year in shares qualifying under the scheme, which is designed to help small companies in the early stages of business.
There is also a capital gains tax reinvestment relief under the SEIS for 2015/16. If you dispose of an asset which would give rise to a chargeable gain and reinvest all or part of the amount of the gain in shares which also qualify for SEIS income tax relief, then an amount of the gain equal to half of the amount reinvested will be exempt from Capital Gains Tax. The maximum amount that can be exempted from CGT in this way is therefore £50,000.
Annual exemption for capital gains tax: the annual exemption for CGT stands at £11,100 for 2015/16, so gains of up to this amount are exempt from CGT. If you have not made gains to utilise your exemption, you may wish to consider if you are able to do so before 5 April 2016.
Annual exemption for inheritance tax: a gift of up to £3,000 per year is exempt from IHT, thus reducing your estate and potentially saving IHT of £1,200. The exemption can be carried forward for one year, so if you did not use your exemption in 2014/15 you can make a gift of up to £6,000 in 2015/16, a potential IHT saving of £2,400.
The existing nil-rate band (frozen at £325,000 until 2020/21) will be joined by an additional ‘main residence nil-rate band’. If the additional nil rate band is available, it will be £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. Thereafter it will increase in line with the Consumer Prices Index. Draft legislation will be introduced in Finance Bill 2016.
Stamp duty land tax (SDLT): From 1 April 2016, a new SDLT surcharge tax of 3% will be introduced on purchase of buy-to-let properties. This rate will apply to all purchases in excess of £40,000 and will be over and above the normal SDLT rates. If you are in the process of buying a property then it might be a good idea to complete the transaction by 31 March 2016.