Now we are into February, with 31 Jan and 2018/19 tax returns behind us, we can think about the 2019/20 tax year. It’s coming towards the end of 2019/20, so it’s important to consider any last-minute year-end tax planning and to review whether all allowances, exemptions and reliefs have been taken advantage of.
Income Tax
Individuals are entitled to a personal allowance of £12,500 and basic rate band income taxable at 20% of up to £37,500. This means that it is not until income exceeds £50,000 that the 40% rate of income tax will apply, and once income exceeds £150,000 the 45% rate of income tax will apply. When an individual’s income exceeds £100,000 the personal allowance is reduced by £1 for every £2 over £100,000.
Another instance to consider levels of income is when families are in receipt of child benefit, as this is withdrawn if one of the partners receives income over £50,000, by 1% for every £100 over £50,000.
It is important to monitor your level of income as it reaches the end of the tax year, as there are several ways to reduce it;
Pension contributions
An individual is entitled to make pension contributions of the lower of £40,000 and 100% of their relevant earnings. If an individual has any unused pension allowance from the previous 3 years, this can also be utilised in the current tax year.
It is important to note that if an individual’s income exceeds £150,000 then the pension allowance will be reduced.
The personal allowance is withdrawn when adjusted net income exceeds £100,000. Adjusted net income is total taxable income less gift aid donations and personal pension contributions. Therefore, if sufficient pension contributions are made, the personal allowance will be reinstated.
As well as giving tax relief via regaining the personal allowance, pension contributions receive tax relief, firstly at source for basic rate tax, i.e. an individual will pay 80% of the contribution and the other 20% is provided by HMRC. Secondly, for higher rate and additional rate tax-payers the basic rate and higher rate bands are extended via the tax return so that more tax will be paid at lower rates, and less at the higher rates.
Gift Aid donations
Gift Aid donations will also reduce an individual’s income level when calculating adjusted net income for the personal allowance. The donation will also increase the basic rate and higher rate bands, so income is taxed at lower rates.
Planning for couples
When you are in a couple there is more flexibility when it comes to tax planning, if say one partner is not utilising their personal allowance or basic rate band when the other is a higher rate tax payer.
Obviously, employment income cannot be transferred but rental income can be transferred between the partners. For example, if a property is jointly owned and the income is split 50:50, an election can be made to split the income 99:1 (although note that the beneficial interest in the capital must also be transferred to reflect the amended income rights and HMRC will not accept the election without proof of the beneficial ownership change).
A Marriage Allowance election can also be made if one partner is not using their full personal allowance, so that the higher earner can benefit from a reduction in tax. (Note, however, than neither individual can be a higher rate taxpayer, as the election cannot be made at all in that case).
Other things to consider for income tax purposes are the timing of expenditure; any large amounts of tax relievable expenditure (for example in your sole trade) should be made at the end of this tax year to obtain the relief earlier, rather than leaving it until after 6 April (cash permitting of course!)
ISAs should also be taken advantage of as they are a tax-free way of saving and you can put up to £20,000 in this tax year.
Capital Gains Tax (CGT)
The timing of capital disposals should be considered to utilise the annual exemption for CGT purposes, which in 2019/20 is £12,000.
A couple have more flexibility when disposing of assets and considering CGT, as assets can be transferred with no tax consequences between couples. For example, if shares are owned solely by one of the couple, 50% can be transferred to the other before disposal to utilise both CGT annual exemptions.
Where any gains are made any capital losses should also be realised so that an offset can be made (subject to this being the right thing to do from an investment perspective, which your IFA will be able to advise on). If applicable a negligible value claim can be made where shares owned have become worthless.
Allowances / Exemptions to note for 2019/20
- Personal Allowance – £12,500
- Capital Gains Tax Annual Exemption – £12,000
- ISA Allowance – £20,000
- Savings Allowance – £1,000 for basic rate tax payers and £500 for higher rate tax payers but no allowance for additional rate tax payers
- Dividend Allowance – £2,000
- Inheritance Tax Gift Allowance – £3,000
If you would like to discuss any of the above, please don’t hesitate to get in contact with us.
