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THE EDUCATION SECTIONMarch 2017The end of the tax year cometh. The tax year ends on Wednesday 5 April 2017 and below we give a little reminder of some things to consider to keep the smile off Hector’s face this tax year. ______________________________________________________________________________________ISAs•Make contribution up to maximum of £15,240•Remember - the allowance cannot be carried forwardPensions •Maximise contributions for this year (maximum current Annual Allowance is £40,000)•Use carry forward rules (unused allowance from previous 3 tax years)•Pay contributions to widen basic rate tax band and reduce tax on capital gains, investment bond gains, etc•Consider pension contributions for children and grandchildren•Use pension contributions to save Personal Allowances or Child Benefit•3 examples of how making a pension contribution can -oadd 25% to the income of a non-taxpayer. Adam stopped working 2 years ago at age 54 & lives on his savings. Click here to see what he should do.oreclaim the Child Allowance for a working family. Gary works and earns £58,00 & Julie doesn’t work. Their 2 children are at secondary school. Click here to see what they should do.oreclaim the Personal Allowance for a high earner. Carol is employed & earns a salary of £120,00 - with a few P11D benefits on top. She is 56 & wants to wind down. Click here to see what she should do.Inheritance tax (IHT)•Make use of annual exemption of £3,000 (plus last year’s £3,000 exemption if not used) NOTESCapital Gains Tax (CGT) •The annual exempt amount for 2016-17 is £11,100. There are no provisions allowing unused annual exemptions to be carried forward so where possible they should be used - by crystallising gains.•Click here to understand more about the rates of CGT, spuse exemption & ‘bed & breakfasting’.Gift Aid•Make donations. A donor in a higher tax bracket can claim back the difference between the basic and higher rates of income tax on amount donatedAs always, please do not hesitate to contact us if you would like further details or information.
Rates of Tax •Gainsaretaxedat20%,orat10%totheextentthatanindividualhasanyunusedpartofthe basicrateband.Howeverifdisposingofaresidentialproperty,gains(noteligibleforPrivate Residence Relief) are taxed at 28% or 18%. Using Spouse Exemption •Everyindividualisentitledtoanannualexemptionsoconsiderationshouldalwaysbegivento including spouses/civil partners in capital gains tax planning strategies, such as:•TransferringAssetsbeforeaSaleTransfersbetweenspousesandcivilpartners,whoareliving together,areeffectivelyexempt(theyaretreatedastakingplaceforaconsiderationwhichgives risetoneithergainnorloss).Butremembertransferstochildrenaresubjecttocapitalgainstaxin the normal way.Bed & Breakfasting •Asaleofsharestriggeringagainwhichwouldnotresultinapaymentoftax(becauseofthe availability of an annual exempt amount, losses – or both) is a valid planning strategy.•Howeverthisstrategywillnotworkifthesharesarerepurchased(bythesameindividual)within 30 days.•Planningstrategiescouldinvolvearepurchasebyaspouse/civilpartner,withinanISA,by trustees,withinapensionarrangementorsimplydeferringtherepurchaseuntilthe30dayperiod has passed (assuming there are no adverse investment issues of course!).
Child AllowanceIfyourtaxableearningsarebetween£50,000&£60,000,makingawelltimedpensioncontribution canrestoreanychildallowancethatmayhavebeenlost,andpotentiallyachieveupto60% effective tax relief by making a pension contribution.Here’s howGary&Juliehave2childrenthattheyclaimchildbenefitfor.In2016/2017thatwouldordinarily meanentitlementtoatotalbenefitof£1,789.Gary’sincomeof£58,000will,however,resultina separate tax charge that will claw back some of this benefit – a ‘high income child benefit charge.’ Garydoesn’tpayanypersonalpensioncontributions,orpayanythingundergiftaid(theother payment type that reduces his income for this purpose) so his adjusted net income is £58,000. Theexcessincomeis£8,000,whichatarateof1%forevery£100excess,resultsinataxcharge equal to 80% of the benefit: £8,000 x 1% x £1,789 = £1,431 What to do?Acontributiontoapersonalpensioncanprotectthisbenefitentitlement.Tofullyprotectthe benefit,‘adjustednetincome’willneedtobecutdownto£50,000orbelow.Agrosscontributionof £8,000paidbefore6thApril2017willbeadequate,whichcostsGary£4,800afterhigherrate income tax relief has been accounted for. ThiscontributioncanbepaidbyGary,oritcanbepaidbysomeoneelseonGary’sbehalf:Julie couldpayittoGary’spensionplanandtheeffectwouldbethesame:athirdpartycontributionis treated for tax purposes as though it was paid by the member. Voila!Garynowhasanother£8,000inhispensionfundatacostof£4,800ANDthethechildallowance remains intact - equivalent to another £1,431 into the family kitty.Want to know more? Do not hesitate to contact us if you would like further details.
Personal AllowanceIfyourtaxableearningsareover£100,000yourpersonalallowanceisreducedby£1forevery£2your incomeexceedsthisthreshold.Thatmeansthatearningsbetween£100,000and£122,000are effectively taxed at 60%ItispossiblehowevertorestorethePersonalAllowanceandpotentiallyachieveupto60%effectivetax relief by making a pension contribution.Here’s howCarol’stotal‘relevant’earnings(includingP11Dbenefits)are£124,500.BymakingaGROSSpension contributionbeforetheendofthetaxyearof£14,500Carolwouldreceiveasizableamountoftax relief on the contribution.Thefirst£2,500ofthecontributionwouldattract40%taxreief(£1,000)andtheremaining£12,000 would attract 60% tax reief (£7,200) by ‘reclaiming’ £6,000 of the Personal Allowanve.ThatmakesCarol’snettcontribution(afteralltaxreliefs)only£6,300-with£8,300beingprovidedby HMRC.Now for the fun part!Carolhasalreadydecidedtoreduceherworkinghours-andhencehersalary-fromthestartofApril and if required, she could access that £14,500 contribution. £3,625wouldbetaxfreeandtheremaining£10,875taxedasincome.Evenif40%taxwaspaidonthe £10,875, that would still provide Carol with £10,150 after tax.Voila!That is an increase of over 60% (before charges) of Carol’s initial £6,300 outlay.Want to know more? Do not hesitate to contact us if you would like further details.
Exempt gifts to use before the end of the tax year!Some gifts made during your lifetime are exempt from IHT because of the type of gift or the reason for making it.Wedding or civil partnership ceremony gifts are exempt from IHT, subject to certain limits:•parents can each give cash or gifts worth £5,000 •grandparents and great grandparents can each give cash or gifts worth £2,500•anyone else can give cash or gifts worth £1,000 Small gifts•You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can't give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether. You also can't use your small gifts allowance together with any other exemption when giving to the same person.•Regular gifts or payments that are part of your normal expenditure•Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle. These include:omonthly or other regular payments to someone oregular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries oregular premiums on a life insurance policy - for you or someone else Non-exempt gifts will remain in the donor’s estate for seven years from date of gifting before dropping out of the IHT calculation.
Using the Personal AllowanceAdamhasnotstartedtakinganybenefitsfromhispensionfundyet&hasbeenusinghissavingsto fund his lifestyle since he left work in September 2014. AshehasnotusedhisPersonalAllowance,orhadany‘relevant’earningssinceSeptember2014,heis now in a position to boost his pension fund & his income with a lot of help from the taxman.Here’s howCurrentrulesallowapersonwithno‘relevant’earningstomakeagrosspensioncontribtioninatax yearof£3,600&receive20%taxrelief-thenetcostisthus£2,880.IfAdamthencombinesthiswith reclaimingtaxrelieffromsomepreviousyears(byusingwhatiscalled‘carryforward’)hecouldthen addanother£10,400tohisone-offpensioncontribution,tomakeatotalgrosscontributionof£14,000. Take off all the tax relief & Adam’s true cost is £11,200.Now for the fun part!OncethecontributionisinhispensionfundhecouldthentakeitalloutTAXFREEwith25%ofthe £14,000(£3,500)beingtakenasfreecash&theremaining£10,500takenastaxedincome.Although the £10,500 is liable to income tax, the amount falls within Adam’s Personal Allowance.Voila!That is an increase of £2,800 (before charges) in potentially a few days.Want to know more? Do not hesitate to contact us if you would like further details.