Generally the personal allowance is £10,600 with entitlement to a maximum of £10,660 for those born before 6 April 1938. Conditions and restrictions apply to the entitlement over £10,600. Non-savings and savings income above the personal allowance is taxed at rates from 20% to 45%.
Some taxpayers with very modest savings and income may only pay 10%. The basic rate of tax increases to the higher rate for taxable income over £31,785 and to 45% when taxable income exceeds £150,000.
A higher marginal tax rate may be payable between £100,000 and £121,200 when the personal allowance is gradually withdrawn giving an effective marginal rate of 60% in this band for non-savings and savings income.
In some cases, you can transfer £1,060 of your personal allowance to your spouse or civil partner.
- Is everyone in your family taking full advantage of their personal allowance?
- Are there opportunities to utilise any unused allowances this tax year?
- What can you do to take advantage of marginal tax rates and reduce the slice taxable at a higher rate?
Capital gains tax
Ordinarily, each person is entitled to make a tax-free gain up to £11,100 (or up to £5,550 for trusts). Thereafter, gains are taxed at a rate that is income dependent. Where taxable income is less than £31,786 the capital gains tax rate for gains up to the spare basic rate band allowance is 18%. Thereafter, this rises to 28%. The rate applicable to a trust is 28%.
For business owners entrepreneurs’ relief gives rise to a lower rate of 10% for qualifying gains which provides for a maximum reduction in tax of £1,800,000 (if the gain were £10 million, the current upper limit).
- What tax can be saved by maximising the advantage of family member tax-free exemptions?
- Should an asset that is going to be sold in the future be transferred into joint names?
- If a gain is going to be realised are there other assets which are standing at a capital loss that can be used to reduce the quantum of your gains?
- If tax is due, are there ways of deferring or rolling over the gain?
Generally, inheritance tax (IHT) is due on death at a rate of 40% if the inheritance threshold of £325,000 is exceeded. The percentage of any unused nil rate band from the first death may be transferred to the surviving spouse, allowing up to double the nil rate band applicable at the date of the second death.
Gifts or transfers made within 7 years of death are also added back into the estate and are liable to IHT, but may be subject to some exemptions as well as a tapered reduction for tax on transfers between years 3 and 7.
You have worked hard to create your wealth – now make sure you do all you can to minimise any payments that may be due for IHT. Estate planning should start early in life but it is never too late to start.
- Do you have an up-to-date Will that reflects your wishes?
- Are you taking advantage of the available exemptions such as the annual £3,000 exemption, gifts out of income, and gifts on marriage or civil partnership?
There are limits to how much can be invested in a pension scheme before a tax charge is payable. To qualify for personal tax relief, a pension contribution must be made by or on behalf of a relevant UK individual.
Tax relief for pension contributions is restricted by reference to net relevant earnings and the annual allowance. The annual allowance is currently £40,000 while there is a lifetime allowance which is currently £1.25 million.
However, it is possible to carry forward any unused allowances from the previous 3 tax years.
Major changes to the annual allowance and lifetime allowance will be introduced from 6 April 2016.
A pension investment is many peoples’ cornerstone as payments into a pension scheme currently attract tax relief of up to a potential maximum of 60%. However, there are undoubtedly other components of retirement planning.
- When might you retire?
- What are your income expectations?
- Is your current plan likely to deliver your expectations?
Individuals who are 18 or over can invest up to £15,240 in an ISA. Withdrawals from an ISA are free of income and capital gains tax, but the value of an ISA will form part of your estate for inheritance tax purposes.
A Junior ISA of up to £4,080 is available for those who are 17 or under.
Help to Buy ISAs, which were launched on 1 December 2015, allow individuals over the age of 16 to save up to £200 into an account per month. Buyers can also deposit a lump sum of up to £1,000 when they set up their account.
The money will earn interest and will also qualify for a 25% bonus (up to £3,000) from the government provided the funds are used to buy a house.
If you don’t already have an ISA, should you start one this tax year? A further advantage is that ISAs are normally readily accessible (subject to scheme rules).
Individuals on low incomes may be eligible to claim tax credits or the universal credit (existing claimants will move to universal credit over by 2017). The calculations for these benefits involve determining 3 figures: your maximum benefit, your net income and your allowance.
The maximum benefit is the amount you would receive if you had no income at all. As some income is disregarded, it is possible that someone could receive the maximum benefit even though they have a small income.
Net income is usually earnings after tax, national insurance and pension contributions. If you have capital above a threshold this may require a notional income to be added.
The allowances are the maximum amount of income you may earn and still receive the maximum benefit. If your income is above this figure, a percentage of the excess is deducted from the maximum benefit.
Check to see if you qualify for these benefits as they can be payable for people with fairly high incomes.
As capital can be treated as income that reduces benefit, it may be sensible to give away funds or to spend them upgrading your property (as property value is not regarded as capital).
However, there are rules to counter blatant examples of capital reduction.
The high percentages at which benefit is withdrawn (between 65% and 76% for universal credit) provide much scope for planning.