Are you happy to pay more tax?
Thursday, 29 March 2018
For 2017/18, the tax free personal allowance is £11,500 (for 2018/2019 it’s £11,850) and the next £33,500 is taxed at 20%. Higher rate tax of 40% is therefore charged on income above £45,000 and additional rate tax of 45% is charged on income above £150,000.
The personal allowance is reduced by £1 for every £2 of income above £100,000 and so there is no personal allowance at all where income exceeds £123,000. Effectively, the rate of tax over the income band £100,000 to £123,000 is therefore 60%. In this band, pension contributions and Gift Aid payments receive tax relief at 60%.
The personal savings allowance entitles basic rate tax payers to £1,000 of tax free savings income and higher rate tax payers to £500. Additional rate taxpayers receive no allowance. Taking action to make sure your income doesn’t go just above the thresholds will be beneficial. You should also consider whether it’s possible to utilise this allowance by charging interest, perhaps on a loan to your business.
Married couples and civil partners have further opportunities for using their allowances.
Capital gains tax (CGT)
Is it possible to utilise your annual exemption for 2017/18, which is £11,300? This is a ‘use it or lose it’ allowance; it cannot be carried forward to future years. It makes sense, therefore, to crystallise gains each year, if possible.
If you’re considering selling a business, or an asset used in the business, you should be entitled to Entrepreneurs’ Relief, whereby CGT is charged at 10% subject to a lifetime limit of gains totalling £10 million. There are conditions that need to be met for a continuous period of 12 months up to the date of disposal. It’s easy to miss out, so take early advice to make sure the gain qualifies for relief.
It’s becoming more commonplace to own two homes for a number of reasons. The gain on your principal private residence is exempt from CGT. If you have more than one private residence, your main residence will normally be, by default, the one in which you spend the most time. It’s important to take advice and carefully plan, but it’s possible to determine your principal private residence by nominating one as such.
Individual Savings Accounts
For the current year, the maximum allowance is £20,000. This allowance must be utilised before 5 April, otherwise it is lost.
You can contribute £40,000 a year into a pension scheme. This can be increased if you didn’t use your allowances in the preceding three years. This allowance will be affected if you earn over £150,000 and can still affect you if income from all sources is over £110,000 – again, we recommend you seek advice.
You should also be aware of the Lifetime Allowance (LTA) considerations. The LTA reduced from £1.25 million to £1 million from 6 April 2016. You can elect for ‘Individual Protection 2016’ at the lower of £1.25 million or the actual value of your fund at 5 April 2016.
For more information on how we can help, please speak to your usual Larking Gowen contact.
Call 0330 024 0888 or email firstname.lastname@example.org.