Plan your tax year in reverse, to avoid end of year panic

As we enter the new tax year, it’s worth noting that lots of the things that people may try to do at the last minute, at the end of the tax year, can be thought about much earlier, saving deadline day headaches.

Everyone can benefit from some planning early in the year but for whom might it be most appropriate?

 

One of those groups is married couples.

From 6 April 2015 new rules come in to force that allow one spouse/civil partner to transfer 10% of their personal allowance to their spouse/civil partner providing neither of them pay tax above the basic rate.  This will be very useful where one of them has low income and would otherwise have wasted their allowances. 

Many individuals who can take advantage of this rule can contact HMRC immediately and ask for the allowance to be transferred which should result in their tax codes being updated so they start making tax savings as soon as possible..

The Child Benefit Charge remains an expensive tax bill for some families – it starts to apply where one member of the family has ‘adjusted net income’ of £50,000.  Once that income exceeds £60,000 the benefit is lost altogether, which can cost a family with two children approximately £1,800pa.  The limits can, however, be extended, such as where the relevant individual makes personal pension contributions and/or gift aid donations, so taking early advice and planning around such amounts, which can have other tax benefits, is important.

From April 2015 the Starting Rate Band of tax, which in some circumstances previously resulted in the first £2,880 of savings income being taxed at 10%, is to increase to £5,000 whilst at the same time the rate will reduce to 0%!

This could give a planning opportunity for people, particularly for those with relatively low pensions (or earnings) but a higher amount of investment income.  By managing tax affairs sensibly, a married couple/civil partners for example could each receive pensions to the value of around £10,600 and another £5,000 in gross bank interest without paying tax.  If the interest had been taxed at source then a repayment claim can be made to HMRC.”

 

Employers could also benefit.

From April 2015 if you employ someone under the age of 21 you will no longer need to pay employers’ national insurance for those earning less than the Upper Earnings Limit (£815 per week).  Therefore, make sure you take this into account when dealing with your payroll to take advantage of this useful saving.  From April 2016 this ‘tax’ break will be extended to wages paid to apprentices under the age of 25.

What about those who are self-employed? Most self-employed individuals pay their Class 2 NIC by monthly direct debt.

Tax Year 2015/16 will see this change to an annual charge made via self-assessment tax returns.  Therefore direct debits should stop for most self-employed individuals once the last payment has been made for the tax year 2014/15.  As Class 2 NIC direct debits are paid four months in arrears the last payment should be made on 10 July 2015. 

Self-employed individuals should be aware of this change and ensure no unnecessary payments are taken from their bank accounts.  It will also add a small increase to their usual tax bills via their future tax returns.

 

Last, but not least, perhaps older generations can take action.

For those with the means, it is often sensible to start any Inheritance Tax planning at the earliest possible time.

Most individuals have an annual exemption of £3,000 per annum, which they can give away in the form of cash or assets without any IHT liability arising.  An unused exemption can be carried forward for one year.

Rather than paying this as one lump sum it can be given away on a monthly basis of £250 which will often be split between grandchildren who in turn could save the money as a future nest egg perhaps for university costs or their first home.

For individuals with higher disposable income the £250 per month can be increased to whatever amount they can afford to give away out of their income without impacting upon their own standard of living.  Where a pattern of such higher gifts is established it may be possible to claim that they are exempt from IHT using the ‘Gifts out of income’ exemption.  HMRC may require evidence of this at a later date and therefore provide a useful record-keeping template via their website. 

The start of the new tax year is therefore a good time to plan ahead for this and start establishing the pattern of regular gifts at the earliest opportunity.

By George Hardey, associate and head of tax at Waltons Clark Whitehill.