The other deadline: year-end tax planning
In the excitement (not sure that’s the right word, but we’ll go with it for now) surrounding 29 March, don’t forget the other deadline that follows one week later: the end of the tax year on 5 April 2019.
There are a number of things that should be done by way of fiscal spring-cleaning before the year-end: we set out some of them in this note; and for more detail on tax planning strategies generally, take a look at our guide here. But let’s start by saying that none of this should be construed as financial advice; where appropriate, specific advice tailored to your own individual circumstances should be sought from a financial adviser.
Pensions normally form a part of sensible tax planning. Generally, there is a limit of £40,000 to the amount that you can contribute each year to a pension. Any unused part of the annual allowance can be carried forward for three years but is then lost. The limit can be reduced if your net income is more than £110,000—the rules are complex but summarised here. And once you have started to draw pension (or otherwise take money out of your pension pot) the annual allowance is cut back to just £4,000.
Tax relief on your contribution is usually restricted to the amount of your “pensionable income” – roughly, income from employment or self-employment. That doesn’t mean that you can’t make contributions if you don’t have such income: just that you can’t get tax relief on them. Even that is subject to a special rule: anyone, regardless of earnings, can benefit from tax relief on contributions of up to £3,600. Thus, it’s possible, for example, to set up a pension fund for a child or grandchild (or a non-earning spouse or civil partner for that matter), pay in £2,880 (that’s £3,600 minus basic rate tax relief) and create a pension pot of £3,600 – and to do the same every year.
So: the first bit of housekeeping is to consider maximising tax-efficient pension contributions for yourself or others before 6 April.
There are other allowances and reliefs that operate on a “use it or lose it” basis. These include your personal income tax allowance and tax bands; Capital Gains Tax (CGT) annual exemption; Individual Savings Account (ISA) annual allowance; and Inheritance Tax (IHT) exemptions. We’ll take them in turn.
Personal income tax allowance and tax bands
If you are in a position to manage your personal income from year to year, you may save tax by ensuring that income falls into this year rather than a future year where it may be taxed more highly. In other words, you may want to ensure that you fully utilise your personal allowance, basic rate or higher rate bands by bringing income forward into 2018/19.
For example, if you run your own company, you may be able to draw additional remuneration or dividend before 6 April. If you are a sole trader, it’s less easy but there may be scope for accelerating recognition of sales of goods or services. Conversely, if you’ve had a particularly good year and are already paying tax at the highest rates, you may want to defer recognition of any further income until after the start of the new tax year on 6 April.
If you have a spouse or civil partner whose marginal tax rate is generally lower than yours, this may be a good time to consider planning for “income splitting” for future years. At its simplest, this may involve transferring income-producing investments and deposits so that income is taxed at a lower rate. More ambitious planning might involve bringing a spouse or civil partner into partnership or transferring shares in your trading company. And don’t forget the possibility of paying remuneration (provided it is commercially justifiable for the work done, of course) to mop up any surplus allowances that might otherwise go unused.
CGT annual exemptions
The same thing goes for CGT annual exemptions. These can’t be carried forward from year to year. If you have assets “pregnant with gain”, you may want to realise enough of that gain to be covered by your CGT annual exemption (£11,700 for 2018/19) by making a disposal before 6 April. And if you have a spouse or civil partner with unused annual exemption, routing disposals through him or her can make further savings. Beware though: “bed-and-breakfasting” (selling shares to realise gain or loss and then buying them back) is countered by special rules: generally, you need to wait 30 days between sale and re-acquisition for “bed-and-breakfasting” to work.
On the investment front, consider ISAs. These are essentially wrappers around cash or share investments which render the returns tax-free: detailed rules are here. The take-away is that you can put up to £20,000 per year into ISAs but any allowance isn’t carried forward from year to year: use it or lose it.
Given the abysmally low rates of interest currently available and the fact that the first £1,000 of interest (£500 if you’re a higher-rate taxpayer) and £2,000 of dividend are tax-free anyway, you might wonder about the benefits of ISAs. The answer may lie in the future. Once money is in an ISA, the return is tax-free forever (or until some future government change the rules, at least). If interest rates were to increase, the tax exemption of interest on the amounts you have cumulatively invested over the years in ISAs might start to look much more attractive.
One other point on ISAs: these (like many accounts) often offer initial “teaser” rates which drop dramatically at the end of the initial period. It’s worth reviewing the position at least annually (and the end of the tax year is as good a time as any to do it) to see whether you have any such accounts and look at shifting them to other providers who pay a market rate.
While you are reviewing your finances, consider IHT. There’s more detail on the rules here. If you are making substantial gifts to individuals, what is important is surviving seven years from the date of the gift: 5 April has no more significance than any other date. But where the tax year is significant is in relation to smaller gifts: there is an outright exemption for £3,000 of gifts made in any one tax year, and any unused exemption can be carried forward one year, but no more. So, if you are contemplating making gifts and you haven’t used the exemption, it’s likely to be worth considering making gifts before 6 April.
Finally, a word to non-residents. If you are managing your non-resident status, you will be acutely aware of the limits to the number of days (or, technically, midnights) you can safely spend in the UK: the number will, of course, depend on a number of factors determined by your own individual circumstances. (Our guide to HMRC’s Statutory Residence Test has further information.) If, having done your day-counting, you find you have some “spare days” remaining where you can visit the UK in 2018/19 without compromising your non-resident status, why not consider doing so? And conversely if you need to come to the UK soon but to do so before 6 April would render you UK-resident for the year, make sure that you defer your visit as necessary.