Options to minimise how much tax you pay and make the most of allowances

TAX-EFFICIENT INVESTMENTS
By understanding which investments are the most tax-efficient, you can make the most of your options to minimise how much tax you pay.

As well as deciding what to invest in, you need to think about how you’re going to hold your investments. Choosing tax-efficient investments will often mean you’re able to keep a higher proportion of any returns you make.
You should always bear in mind that tax rules can change in future. What’s more, the benefit to you of favourable tax treatment (such as that given to ISAs - Individual Savings Accounts) will depend on your individual circumstances. Products come and go and change too, such as the announcements in the recent budget about ‘Help-to-Buy’ ISAs and the new ‘LISA (Lifetime ISA)

MAXIMISE YOUR ISA ALLOWANCE
UK residents aged 18 and over can invest up to £15,240 each in an Individual Savings Account (16 and over for a Cash ISA), and parents can fund a Junior ISA or child trust fund with up to £4,080 per child – making a total of £38,640 for a family of four before 6 April 2016.

If you have adult children who are planning to buy a home, it would make sense to gift funds to them so that they can invest in the new help to-buy ISA. This became available for a four year period from 1 December 2015 to help first time buyers. Individuals aged 16 or over can save up to £200 per month (up to £1,200 in the first month), to which the Government will add a 25% tax-free bonus, from a minimum bonus of £400 up to a maximum amount of £3,000 on £12,000 of savings.
Income and capital gains from ISAs are tax-free, and withdrawals from adult ISAs do not affect tax relief.

INSURANCE BACKED BONDS
Provided by major insurance companies, life insurance backed bonds offer relatively secure returns to investors (depending, very much, on the underlying investments). They have the added tax advantage that up to 5% of the original capital invested can be withdrawn each year with no immediate tax liability. After such withdrawals reach 100% of the original capital, Income Tax is payable on further withdrawals or on surrender of the policy.

Individuals whose level of income means that they will lose their personal allowance and/or pay 45% Income Tax may now find the 5% tax-free withdrawals facility particularly attractive. Some friendly societies offer regular premium policies which run for ten years or more and can qualify for full Income Tax exemption on the gains accrued. However, since 6 April 2013, investment into such qualifying policies has been limited to £3,600 a year for all arrangements set up after 21 March 2012. Any amounts invested in new policies that are in excess of the annual limit will not qualify for the favourable tax treatment.

Increases to existing policy premiums will be classed as creating a new non-qualifying policy, but if you have a pre-21 March 2012 policy it should be advantageous to keep the policy going until the existing maturity date.

OFFSHORE BONDS
Offshore life assurance bonds allow income to accumulate virtually tax-free until they are disposed of, at which point they are taxed in full at your marginal rate. As with UK bonds, up to 5% of the original capital invested can be withdrawn each year until the original capital has been withdrawn in full with no immediate tax liability.

While the maximum rate of Capital Gains Tax remains at 28%, alternative collective investments may be more attractive for short-term investment. However, offshore life assurance bonds offer the flexibility to defer tax into a year when other income is lower, or until a year when income losses are available to offset the profits, or a year when you are not tax-resident in the UK.

As with so many financial products, there can be complications when investing in insurance backed and/or offshore bonds, so it really is important in most circumstances obtain professional advice before entering such schemes.

EMPLOYER TAX BREAKS
If your employer offers a share scheme, there are usually price discounts and tax breaks for taking part.

Where you can participate each year, plan carefully to use annual contribution limits and manage share purchases so that there is a steady flow of potential share sales in future tax years, allowing you to maximise use of your annual capital gains exemption.

Shares acquired under share incentive plans (SIPs) or sharesave (SAYE) schemes have minimum holding periods. It may not be possible to hold such shares in an Individual Savings Account, so any dividends received on the holdings will be taxable. However, from April 2016 onwards, a new dividend nil rate band will apply so that the first £5,000 of dividend income is not taxed.
It’s important to obtain professional advice before entering such schemes.

TAX PLANNING IN GENERAL
Optimising your tax position is paramount in the run-up to the financial year end
Taxes, as we know, are one of the two great inevitables in life. As the UK tax system continues to grow ever more complex, and with more responsibility being placed on the individual to get their own tax right, ensuring that you receive the best professional advice to optimise your tax position is paramount.

Appropriate tax planning could help you substantially reduce tax liabilities and defer tax payments. The tax planning advice you need will depend on your particular circumstances and how complicated your financial affairs are. We have provided details of a number of tax planning areas you may wish to review, especially as we are now in the run-up to the 2015/16 financial year end on 5 April.

IT’S GOOD TO GIVE
Personal income over £150,000 is taxed at 45%. However, because the personal allowance is reduced by £1 for every £2 of net income over £100,000, for income between £100,001 and £121,200 the effective top rate is 60%. Individuals with incomes near these thresholds could potentially reduce their tax liabilities by reducing their taxable income below £100,000 or £150,000. This may be achieved by changing income into non-taxable forms, giving income yielding assets to a spouse with lower income, deferring income, making pension contributions or making payments to charity.

EXCHANGING CASH PAYMENTS
It is already common for employers to offer arrangements allowing employees to exchange a cash payment for approved share options, benefits in kind or pension contributions in lieu of salary. Employees who exchange income (for example, to take them below the £100,000 threshold) in return for a tax-free pension contribution made by their employer would save Income Tax and NIC.

TAXABLE DIVIDEND INCOME
The effective rate of tax on taxable dividend income, for example, from shares not held in an Individual Savings Account (ISA) or pension fund, will rise by up to 6% for some taxpayers from 6 April 2016. However, there will also be a new £5,000 nil rate band on dividend income, so the exact rate of tax anyone pays on their dividend income will depend on the amount they receive and their other income in 2016/17.

If you receive a significant amount of dividend income from your own or a family company, there may be advantages in bringing forward dividends into the 2015/16 tax year. However, if you are normally a basic rate taxpayer, taking a large dividend that pushes your total income into the higher rate of tax or results in a loss of personal allowances could be counter-productive.

Conversely, if you receive relatively low levels of taxable dividend income, it may be beneficial to defer dividends until 2016/17 so that you can benefit from the new dividend nil rate band.

For what appears to be a simple new ‘£5,000 nil rate band’ the outcomes can be very different depending on the amount and source of your income. You should obtain professional advice on the most appropriate option for your particular situation.

REARRANGING SUBSTANTIAL INVESTMENTS
If you have substantial investments outside an ISA or other tax-efficient wrapper, consider rearranging them so that they produce either a tax-free return or a return of capital taxed at a maximum of only 28%, rather than income taxable at a maximum of 45%. The recent budget announcement of a reduction in capital gains tax will make this type of arrangement more attractive still.

COMPANY CARS TAX
Each year, the taxable benefits on company cars are effectively increased by reducing the level of CO2 emissions that trigger each 1% increase in benefit.

For example, a car with emissions of 150g/km triggers a 25% taxable benefit in 2015/16, but the same car will give rise to benefits of 27% in 2016/17 and 29% in 2017/18.

It may be worth using your own car for business travel and claiming a tax-free mileage allowance from your employer. If fuel has been provided for private use, consider whether full reimbursement of the cost to the company would be a cheaper option than paying the fuel scale charge, which is based on the car's CO2 emissions.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.CI

LET’S MAKE IT A DATE
Key financial dates to put in your diary this year
The remainder of 2016 is certainly going to be a busy one, with April seeing a raft of changes announced previously – affecting pensions and savings – coming into effect.
Below we’ve provided some of the key dates that could impact on your financial plans both this year and beyond.

DATES FOR YOUR DIARY
16 MARCH
Chancellor George Osborne’s Budget 2016 speech.
There is an article here if you’d like a reminder of the financial planning highlights

1 APRIL
An increase in stamp duty for landlords. If this applies to you as you’re buying a second home or buy-to-let property, you’ll need to pay an extra 3% in stamp duty on the entire price – and that’s on top of the rates residential buyers pay.

5 APRIL
Last day of the 2015/16 tax year. It’s also the deadline for claiming a PAYE tax refund for the 2011/12 tax year and any tax overpaid under self-assessment for 2011/12, as well as for making payments into your ISA and/or pension against the current year’s allowances.

6 APRIL
New ‘flat rate’ State Pension of £155.65 per week comes into effect for those reaching State Pension age from this date. Personal savings allowance is introduced. This is set at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. This means they can earn that much in interest before tax is due. The allowance is £0 for additional-rate taxpayers.

Reduction in lifetime allowance to £1million.

Reduced annual allowance for those people with ‘adjusted annual incomes’ of over £150,000 and threshold income over £110,000.

Complete removal of contracting out from the Additional State Pension scheme that will mean an increase in National Insurance to the normal rates for those still contracted out (under defined benefit pension schemes).

New rules for flexible Individual Savings Accounts (ISAs) become effective, allowing investors to withdraw cash and replace it in the same tax year without impacting their annual ISA allowance.

Pension input periods to align with tax years.

New dividend taxation regime begins.

Everyone will be able to earn £5,000 of dividend income without paying any tax.

Dividend income in excess of the allowance will be taxed at 7.5%, 32.5% or 38.1%, as appropriate.

Scottish rate of Income Tax comes in for Scottish taxpayers, although initially it means no change to the overall tax rate.

JULY
By 31 July, the second payment on account for the 2015/16 tax year is due to HM Revenue & Customs by anyone using self-assessment.31 July is also the deadline to renew your tax credits – if you don’t complete your renewal pack and return it by this date, your tax credits will stop.

NOVEMBER
This is generally the time of year when we can expect the Chancellor to deliver the Autumn Statement and set the scene for the 2017/18 tax year.

Ian Green

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March 21, 2016