The end of the tax year has been and gone, it’s a time of the year that never ceases to amaze us.
Why do so many people wait until the end of the tax year to sort out their financial affairs? It makes far more sense to do so at the start of the tax year and enjoy almost a year’s extra tax efficient saving and investing.
On that note we’ve put together a list of six things you should consider doing now to make your financial affairs as tax efficient as soon as possible.
1. Use your ISA allowances
Yes we know this is obvious, but there are still people who don’t use their ISA allowances each year and are therefore needlessly paying tax on the interest they receive on their savings or the growth on their investments.
The ISA allowance for the 2012 / 13 tax year is £11,280 of which half can be put into a Cash ISA.
If you are the sort of person who uses their ISA allowance each year then do so sooner rather than later, what’s to be gained by delaying? If you are worried about making the wrong decision then simply choose an ISA which doesn’t tie up your capital.
2. Check whose name your savings are held in
For savings not held in ISAs and if you are married or have a partner, then generally speaking the savings should be held in the name of the lowest rate tax payer.
Take a married couple, where one is a higher rate tax payer and the other pays no or just basic rate tax. If the savings are held in joint names then half will be taxed at 40% and half at 20% or 0%. However, if the savings were moved into the name of the lower rate taxpayer, the tax would be reduced significantly.
This simple yet often overlooked step can save significant amounts of tax on the interest you receive, of course you need to trust your spouse or partner!
3. Other tax free savings option
Unfortunately it seems as though the much loved National Savings & Investments (NS&I) Index Linked Certificates will not be returning any time soon and there are currently no NS&I Fixed Interest Certificates for sale. This somewhat limits your tax free savings options once you have used your Cash ISA.
Premium Bonds generally provide a pretty low return of around 1% per year and we rarely recommend these unless they are for higher rate tax payers looking for a short term home for their money with instant access.
If you are saving for children or grandchildren then Junior ISA’s and Child Trust Funds I could be worth considering as a tax free savings option, although the benefit is somewhat limited by the fact most children are not tax payers anyway.
Unfortunately that pretty much exhausts your tax free savings options.
4. Tax relief on pensions
Most people know they get tax relief on pension contributions.
Tax relief means more money in your pension and of course you get growth on that money. If you often make lump sum contributions at the end of a tax year, why wait? Make them as soon as you can and start getting growth on the tax relief as soon as possible.
For those people wanting to make larger pension contributions and really take advantage of the tax relief available, Carry Forward or changes to your Pension Input Periods can help increase the maximum allowable contribution; if you would like to know more about this please contact one of our team of advisers who can talk you through the options.
5. If you work for yourself check how your income is structured
Ken Livingston is rarely featured in our articles; however he and his tax return have rarely been out of the news over the past few weeks. He is certainly a man who seems to have structured his personal income as tax efficiently as possible.
If you work for yourself, or own a business, the start of the tax year is the ideal time to check that your business is set up as tax efficiently as possible:
• If you are a sole trader or partnership would it be more tax efficient to trade as a limited company?
• If you are already a limited company have you got the split between PAYE income and dividends right?
• If you are a sole trader or partnership could you create a directors loan account by selling our goodwill to the new limited company?
Some of these options could be right for you, others not, but working with your IFA and accountant you can decide on the most appropriate trading structure for you and your business.
6. Remember the Capital Gains Tax rule
On the other hand you may pay CGT if you sell, for example, shares, a buy to let property, or other investments not held in an ISA.
Everyone has an annual CGT allowance of £10,600, which is the amount of gain you are allowed to make on taxable assets before you pay CGT.
There is no CGT on assets passed between spouses, therefore if an investment is held in the name of one spouse and it is transferred to joint ownership, before it is sold, double the amount of CGT allowance can be used, significantly reducing the tax.
CGT can be a complex tax, but the message is simple, if you have assets you are thinking of disposing of plan well in advance. Think about who owns the asset, the gain you have made and plan carefully when you sell it, so that you pay as little tax as possible.
Next steps
Capital Gains Tax (CGT) is generally paid on assets which you have made a profit on and are not subject to other ‘tax breaks’, for example you do not pay CGT on certain business assets, money held in ISAs or indeed your main residence.
Our aim is simple, to get people thinking about saving tax now, and not waiting until the end of the tax year when they will join the mad scramble of everyone else trying to make last minute ISA or pension contributions.
Planning at the start, rather than the end of the tax year, has two key advantages, firstly you will enjoy the tax efficiency for longer and secondly, you won’t make hurried decisions because the 5th April is looming.
Our team of Independent Financial Advisers in Nottingham are experienced in arraning the savings and investments of our client in a tax efficient way. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
