Personal tax - the basics
Personal Allowances: Tax free income: £10,000 - £10,660
Basics
Most taxpayers are entitled to a certain level of income that is free of tax. Generally for those born after 5 April 1948 the personal allowance is £10,000 with entitlement to a maximum of £10,660 for those born before 6 April 1938. As ever, conditions and restrictions apply to the entitlement over £10,000. Above the personal allowance income is taxed at rates from 20% to 45%, though some taxpayers with very modest savings and income may only pay 10%.
Planning pointers
Is everyone in your family taking full advantage of the personal 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? The basic rate of tax increases to the higher rate for taxable income over £31,865 and to 45% when taxable income exceeds £150,000. A higher marginal tax rate may be payable between £100,000 and £120,000 when the personal allowance is gradually withdrawn giving an effective marginal rate of 60% in this band for non-savings and savings income.
Capital Gains Tax: Taxing realised gains: £11,000 this year
Basics
Ordinarily, each person is entitled to make a tax-free gain up to £11,000 (or up to £5,500 for trusts). Thereafter, gains are taxed at a rate that is income dependent. Where taxable income is less than £31,866 the capital gains tax rate for gains up to the spare basic rate band allowance is 18%. Thereafter, this rises to 28%. The rate applicable to a trust is 28%. For business owners entrepreneurs' relief gives rise to a lower rate of 10% for qualifying gains which provides for a maximum reduction in tax of £1,800,000 (if the gain were £10 million, the current upper limit).
Planning pointers
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 the quantum of your gains? If tax is due, are there ways of deferring or rolling over the gain?
Inheritance Tax: Tax on lifetime gifts and on death: £3,000
Basics
Generally, inheritance tax (IHT) is due on death at a rate of 40% if the inheritance threshold is exceeded. The current nil rate band threshold for IHT is £325,000. 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 7 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 3 and 7.
Planning pointers
You have worked hard to create your wealth - now make sure you do all you can to minimise any payments that may be due for IHT. There are many opportunities to plan and the key is to plan thoroughly and in good time. Estate planning should start early in life but it is never too late to start. Do you have an up-to-date Will - one that reflects your wishes? Are you taking advantage of the available exemptions such as the annual £3,000 exemption, gifts out of income, and gifts on marriage or civil partnership?
Pension contributions: annual allowance £40,000
Basics
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 contribution must be a pension contribution made by or on behalf of a relevant UK individual. Tax relief for pension contributions is restricted by reference to net relevant earnings and the annual allowance. The annual allowance is currently £40,000 while there is a lifetime allowance which is currently £1.25 million. However, it is possible to carry forward any unused allowances from the previous 3 tax years.
Planning pointers
Planning ahead, no matter what your current financial situation, is not optional. It should be mandatory. A pension investment is many peoples' cornerstone as payments into a pension scheme currently attract tax relief of up to a potential maximum of 60%, however there are undoubtedly other components of retirement planning. When might you retire? What are your income expectations? Is your current plan likely to deliver your expectations?
ISAs: tax-free savings account: £15,000
Basics
Individuals who are 18 or over can invest up to £15,000 in an ISA. Income and capital gains are tax-free while in an ISA, but any investment in an ISA is liable to inheritance tax. A Junior ISA of up to £4,000 is available for those who are 17 or under.
Planning pointers
If you don't already have an ISA, should you start one this tax year? A further advantage is that ISAs are normally readily accessible (subject to scheme rules).
Tax Credits
Basics
Individuals on low incomes may be eligible to claim tax credits or the universal credit which was introduced in some parts of the UK in October 2013. Existing claimants will move to universal credit over a 2-year period to 2017. The calculations for these benefits can be complex. Basically, they 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 though they have a small income. Net income is usually earnings after tax, national insurance and pension contributions. If you have capital above a threshold this may require a notional income to be added. 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.
Planning pointers
Check to see if you qualify for these benefits as they can 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.
The high percentages at which benefit is withdrawn (between 65% and 76% for universal credit) provide much scope for planning.
