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Top tips for end of year planning
In the latest episode of TAXtv Giles Mooney and Tim Good discuss upcoming changes to interest, dividends and pension contributions in the run up to 6 April.
With self assessment season now completed, many accountants will be speaking to clients and planning ahead before the new tax year starts.Among the big changes coming in, perhaps the most important concern changes to dividends.
TAXtv presenter Tim Good said the interest changes were fundamental, particularly around the personal savings allowance, and would create “ridiculous” marginal tax rates.
Many accountants will not have had a chance yet to look at the detail, however from April, for basic rate taxpayers the first £1,000 will be tax free, but as soon as you tip over from basic rate into higher rate that allowance drops from a £1,000 to £500, and similarly when you tip over from higher rate into top rate, at £150,000 of income, then you lose it altogether.
Good explained how it was going to work: “Take a director shareholder with £43,000 exactly of income, that £43,000 for 2016/17 being the £11,000 personal allowance, plus the £32,000 of basic rate band that will then give us a threshold for higher rate of £43,000. At that level £1,000 of interest will be completely tax free. But if you have £43,001 then instead of £1,000 of tax free interest you only get £500. That means £500 becomes taxable at basic rate 20% so that’s additional tax of £100 plus 20p on the additional £1 of income, which is effectively a 10,000% tax rate,” he said.
That change, coupled with the way in which the savings rate band, giving £5,000 of interest at 0% if it’s within the basic rate band, coupled again with the introduction from April 2016 of the dividend tax allowance, makes personal tax computations “unbelievably complicated”.
Good said advisers will first want to understand how the tax calculations work and then advise clients on the optimum mix.
Moving on to dividends, for some there will be an advantage of accelerating dividends and having them paid before 6 April 2016, particularly for those who are going to be adversely affected by the 7.5% surcharge that’s coming in.
However for others with relatively small amounts of dividend income, there will be an advantage in deferring a dividend to April 2016 if by so doing the dividend becomes tax free within the £5,000 dividend tax allowance.
Good said: “The great thing about both dividends and interest is that they are taxed essentially on a receipts basis, so we can manipulate the tax year in which the income falls relatively easily. But we need to think about it in March.”
New pension changes also come in from April, reducing the amount you can pay into a pension once earning more than £150,000.
As revealed in the July 215 Budget, the Chancellor is reducing to £10,000 the annual allowance, which currently stands at £40,000, which is the tax relievable amount you can pay into your qualifying pension.
Good made the point that when it comes to auto enrolment, in a few years’ time if AE contributions increase up to 8% with an income of £150,000, then the £12,000 will breach the restricted £10,000 allowance by virtue of their AE workplace pension contributions.
In the shorter term accountants who have clients who are going to be affected need to assist their clients in planning. “In many cases it will be a matter of accelerating contributions to before 6 April,” he said.
Accountants should also not forget to advise on stakeholder pensions for children and grandchildren.
“Putting in £2,880 a year net into a stakeholder pension for children and grandchildren, no matter how young, will be very effective for planning for a family and as part of inheritance tax planning. If you’ve not started yet, but can afford to, then do it,” Good said.
Moving away from person tax, Giles Mooney said there were things you should do every year around capital gains tax, like negligible value claims.
“If an asset has become of negligible value and you’ve not made an actual disposal you can nevertheless crystallise the loss on that asset for CGT purposes by electing to have it as a deemed disposal,” Good said. “The two years comes in because if let’s say on the 15 March 2016 you claim that an asset has become of negligible value you can actually back-date that up two years and establish it as a capital loss not of 2015/16, nor even 2014/15 but actually 2013/14, so you can effectively crystallise the loss up to two year before making the claim,” Good said.
Other tax planning advice in the discussion looked at spousal ‘bed and breakfasting’, the landlords wear and tear allowance, help to buy ISAs and gift aid donations.
