2016/17 End of year tax planning-use your allowances to reduce your tax bill
Some tax savings tips that can be implemented before April 5th.
For tax year ending 6th April 2017
Last chance to take full advantage of your tax free allowances and exemptions before the end of the tax year- 5th April. Making sure to use up any allowances you are entitled to is the first step in reducing the amount of tax you are liable to pay. In some cases using up allowances such as pension contributions can reduce your gross wage enough to affect tax brackets and the amount of children's allowance you may lose. Below are a list of personal tax free allowances which we are each entitled to and which must be used on or before the 5th April 2017. The rates given are correct for the 2016/17 tax year.
When you use an allowance, such as your pension allowance, you reduce your total income assessed for tax. Reducing your gross earning figure can also help if your earnings are not far above the 20% threshold, or the earnings threshold for Children's Allowance. By using an allowance, such as your pension allowance, you can reduce your gross figure to below the 20% cut off point, avoiding having to pay 40% on anything above it, while providing for your financial future at the same time.
You can also use your allowances to help loved ones who are just over thresholds such as the Child Benefit Earning threshold or the 20% tax rate threshold. Gifting them a larger sum which they place in their pension allows them to use up their pension allowance while reducing their taxable earnings by that same amount. It can also help reduce your estate for Inheritance Tax (IHT) purposes if that is something you are interested in doing.
ISA/ Tax Free Savings Allowance
We are all entitled to save up to £15,240 this year, tax free. This £15,240 can be placed in a cash ISA, a stocks and shares ISA, or you can mix and match between cash and shares as you like. If you have savings accounts, you should have an ISA. In a regular savings account you pay tax on interest earned at either 20% or 40%, depending on your tax rate. Savings in an ISA are not subject to tax. This makes it nearly impossible for a regular savings account to beat the return made in an ISA. Just like a regular savings account, cash ISA's can be instant access, fixed term, etc. It is worth shopping around for the best rates as they can vary greatly. You can change providers as you want, to access better rates, depending on the conditions of the ISA accounts you have open.
To make the best use of your ISA you should top up the max amount as early on in the tax year as you can, making the most of the interest earned.
New rules brought in from April 2016 mean any money you withdraw from your cash ISA, or a cash holding in an investment ISA, and then pay back in, will not count towards your allowance. That means if you invest the maximum £15,240 and then take out £1,000, you can top up your account to £15,240 again.
Just like ordinary ISA's, there are Junior ISA's. They can be opened for children under 18. The child can take control of the ISA's from the age of 16, but cannot withdraw from them until they are 18. This years annual tax free Junior ISA allowance is £4,080. You can mix and match as you would like between cash and share ISA's. If contributing the maximum yearly contribution to your child's ISA is beyond your means, there is nothing to prevent a grandparent from contributing to their grandchild's ISA. Between the ages of 16 and 17 a child can actually access both Junior ISA allowance and ordinary cash ISA allowance as they meet the criteria for both!
In the 2016/17 tax year you are able to place up to £40,000 in to a pension, tax-free. Any past years Pension Contribution Allowance which had not been used up can still be carried forward, but only for the last 3 tax years. Using your pension allowance can significantly reduce the earnings you get taxed on, possibly bringing your earnings for tax purposes down into the another tax bracket. It should also be noted that your pension allowances can be back dated for up to 3 years. So if you have used only some, or none, of the £40,000 each, from the last 2 years, and the £50,000 allowance from 2013/14, you can carry it forward and use up to a possible £170,000 this year, tax free. You must use up this years allowance in full first, and then you can claim previous years unused allowances. Any 2013/14 unused annual allowance will be lost if not used by the 5th of April.
Top up State Pension
If you want to top up a National Insurance shortfall from previous years for the sake of your State Pension, you can do so, but only for any of the previous 6 years. Time is running out to top up NI contributions from 2010/11- you have until the 5th April.
For those individuals whose earnings are in and around the tax band thresholds, some last minute planning may be tax efficient. The 40% tax band was widened to £32,000 for this year. The Personal Tax Free Allowance was increased to £11,000 for 2016/17. This means up until April 5th you can earn up to £43,000 without going into the 40% tax band (Personal tax free allowance of £11,000 + £32,000). Including more earnings in 2016/17 tax year may be an option if you are still under the £42,000 annual threshold at the end of this tax year. You may be able to have a pay bonus or dividend paid before the 5th April rather than after to use up to your maximum earning threshold.
Reclaim Overpaid Tax
Time is running out to claim any overpaid tax back from 20012/13. You can claim back overpaid tax for four previous years only.
Everyone has a basic personal tax free allowance. This is the amount of money you can earn tax free each year. You do not normally need to do anything in order to receive this as it should automatically be applied when you are paying tax. If you earn over £100,000 this will be reduced, but otherwise it is £11,000 (2016/17 tax year). In 2017/18 this increases to £11,500. For 2016/17 those aged over 65 the rate is £11,000; over 75 it is £11,000. For all 2016/17 rate changes see our Budget Summary.
Marriage Allowance lets you transfer £1,100 of your Personal Allowance to your husband, wife or civil partner - if they earn more than you. So if you are married and earn less than £11,000, you can transfer the balance of your unused allowance, up to limit of £1,100, to your spouse. This can reduce their tax bill by up to £220.
Important to note that if you were eligible for Marriage Allowance in the 2015/16 tax year, you can backdate your claim to 6 April 2015 and reduce the tax paid by up to £432.
If one of you was born before 6 April 1935, you might be better off using the Married Couples Allowance: which could reduce your tax bill by between £322 and £835.50 a year.
Keep your Children's Allowance
The introduction a few years ago of the High Income Child Benefit Charge means those couples with combined earnings of over £50,000 start to loose some of their child benefit. By the time you get to £60,000 in earnings, your Child Benefit payment has been taken in tax. The obvious way to lessen this is through increased pension contributions. See our article on ways to lessen the amount you lose from Child Benefit Charge .
Annual Inheritance Tax Exemption
The first £3,000 given away each tax year is not subject to Inheritance Tax. Amounts greater than £3,000 can later become subject to inheritance tax, if you die within 7 years. If you don’t use the exemption this year, you can carry it forward for one tax year and use it then. As such, if you want to avail of 2015/16's unused Inheritance Tax Exemption, you must do so before April 5th. There is also the Small Gifts Allowance, which means you can give up to £250 to any individual each year without being subject to IHT. These small gifts can be repeated as many times as you want, so you could use them as a way to, for example, add to your grandchildren's Junior ISA's. In this case you would be using up your gifting allowance and their tax free savings allowance at the one time. Also, there is no tax on wedding or civil partnership gifts worth up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. For a more detailed look at Inheritance Tax and Estate Planning see our Guide.
Annual investment allowance
If you are a landlord or run your own business, take advantage of the annual investment allowance (AIA) to claim for capital expenditure on items such as machinery and computers. Since January 2016, the allowance was up to £200,000 a year. In 2015, the limit was £500,000.
Capital Gains Tax Annual Exemption
The annual exemption is £11,100 for 2016/17. If you have unrealised gains, you may decide to dispose of some before the end of the tax year to use up your annual exemption. Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another before realising a gain can be tax efficient. As far as possible it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward.
When you sell a property that qualifies for the main residence tax relief, you do not have to pay Capital Gains Tax (CGT) on it. This main residence relief is extended for 18 months after you vacate the property (previously this had been 36 months). What this means is that you can sell your family home within a year and a half of moving out of it and still qualify for the main residence relief, that is, pay no CGT.
You receive tax relief, at whatever the highest rate of tax is that you pay, on any charitable donations made during the year. This can be a useful and generous way to reduce your gross income to below certain thresholds, while giving money to charity instead of HMRC.