Year-end tax planning – are you ready?

(1)Personal allowance

In 2015/16 most individuals can receive £10,600 income that is not liable to tax. Unused personal allowances cannot be carried forward or transferred, so it’s a case of “use it or lose it”.

The allowance is steadily lost at a rate of £1 for every £2 of income where the adjusted net income is over £100,000. It is vital to be aware of the effect of this, when planning at the end of the year, as it can create an effective income tax rate of 60 per cent for income levels between £100,000 and £121,200. 

(2) Use your annual pension allowance

Transitional rules, for 2015/16 only, mean that there’s an annual allowance of £80,000, although only £40,000 of this can be used until 5 April 2016. You may also have unused annual allowances from the three previous tax years.

This is a one-time chance to put an extra amount in to your pension, provided certain conditions are met; however we’re continually finding people unaware of the ability to do this.

(3) Changes to the taxation of dividends 

From 6 April 2016, the taxation of dividends will change. The ten per cent tax credit will cease, but from 6 April 2016 the first £5,000 of dividends will generally be tax free. This is a zero per cent band of tax on top of the personal allowance, although dividends in the band can count against other benefits.

Read more about navigating the tax landscape:

Depending on your circumstances, you may want to consider accelerating dividends to 2015/16, or delaying them to 2016/17, if you hold shares in companies in which you can influence the dividend.

(4) Capital gains tax

The capital gains tax (CGT) annual exemption of £11,100 for 2015/16, as with the personal allowance for income tax, cannot be carried forward to a future year if unused. If you’re married, both you and your spouse each have an annual exemption.

Transferring assets with gains to a spouse prior to any sale can help to ensure that the exemption is not lost. 

(5) Tax efficient investments 

ISAs – the 2015/16 overall limit for ISAs is £15,240. This can be invested in cash or stocks and shares. Any income or gains arising on the investments will be tax free.

SEIS, EIS and VCTs – Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) offer generous tax benefits to encourage investment in young, growing companies. The tax advantages can be attractive for investors and helpful to entrepreneurs looking to raise funds but they do entail more risk.

If you haven’t started thinking about it yet, now is definitely the time to get your year-end tax affairs in order.

With the old adage stating “in this world nothing can be said to be certain, except death and taxes”, Real Business also took a look at all the important changes to the tax structure implemented at the start of the financial year.

Chris Springett is director in private client tax services at Smith & Williamson.

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