Tax Planning and your Personal Allowance

In recent years the reductions in the higher rate threshold and increases in personal allowances, have made tax planning necessary for a wider amount of people. Considering methods of maximising the usefulness of your personal allowance and being aware of what the current higher and upper rate thresholds are, is instrumental in ensuring that the most of your hard earned income is retained.

A few useful tax planning recommendations are detailed below:

  • Ensure both partners’ annual ISA allowances are fully utilised before making investments into taxable ones.  Your annual ISA allowance in the 2013/14 tax year is £11,520.
  • When selling an asset it is vital to consider your Capital Gains Tax (“CGT”) allowances and that of your spouse. Assets can be transferred between spouses tax free and this can be useful in fully utilising each partner’s annual CGT allowance.  Your annual CGT allowance in the 2013/14 tax year is £10,900.
  • Income-generating assets should be transferred to the partner earning the lower income. This will make use of their personal allowance or, alternatively, ensure the income earned is not taxed at the higher marginal rate of the partner with the larger income. The higher rate threshold for the 2013/14 tax year is £32,010. Income over this rate will be taxed at 40%.
  • Pension contributions for people earning above the higher rate threshold are increasingly popular means of savings on your tax, as the value of your gross contribution will extend your higher rate thresholds.  A gross contribution of £10,000 will extend the higher rate threshold for the 2013/14 tax year from £32,010 to £42,010.
  • A contribution of £8,000 into a registered pension scheme will be “grossed up” by the government to £10,000. Furthermore, this contribution will generate a tax saving of up to £2,000.  Your annual pension contribution allowance in the 2013/14 tax year is £50,000.
  • The same applies for individuals earning above £150,000 interested in taking advantage of the extension in tax thresholds as a result of pension contributions.  The upper rate threshold for the 2013/14 tax year is £150,000. Income over this rate will be taxed at 45%.
  • On the other hand, a salary sacrifice pension contribution of £10,000 (gross) will result in your employer passing on their employer NI saving of 13.8% into that pension fund. This means that £11,380 will be invested into your pension (excluding any matching contributions the employer might have done). The after tax implication on your salary as a result of the above is a sacrifice of only £6,000.
  • Additionally, if you are earning over £100,000, a pension contribution or salary sacrifice can be used to claw back some or all of your previously lost personal allowance.
  • The income limit above which you start to lose personal allowance (at rate of £1 for each £2 you earn above limit) for the 2013/14 tax year is £100,000.
  • The annual pension contribution allowance will be reduced in the 2014/15 tax year from £50,000 to £40,000. If possible it is advisable to utilise as much of your personal pension contribution allowance (and that of your partner) in this tax year to make the most of the tax savings currently available.

Lastly, as a result of recent reductions in the annual pension contribution allowance, VCT & EIS schemes have gained considerable popularity. Investments into these can lead to significant tax savings:

Venture Capital Trust (VCT)
o Up-front income tax relief of 30% (on up to £200,000 invested per tax year if the shares are retained for five years)
o tax-free dividends
o tax-free capital gains (when you sell your shares)
Enterprise Investment Scheme (EIS):
o 30% Income Tax relief (on investments up to £500,000 in the2011/12 tax year and up to £1m in 2012/13)
o Tax-free gains on any profits from the investment (after 3 years)
o Capital Gains Tax deferral relief
o 100% Inheritance Tax exemption on all investments (after 2 years)

If you would like further advice on the above recommendations, please feel free to call us at Tax Agility on 02087802349.

This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.

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