The End of the Tax Year

As we approach the end of another tax year there are, as ever, opportunities for many taxpayers to minimise the tax they pay, some of which may require action to be taken before 5 April. There will be a Budget on 16 March and some proposed changes to certain aspects of the tax system will be confirmed then but clearly that does not leave a lot of time between then and 5 April. I will highlight below a few planning points to consider before 5 April:

Individual Savings Accounts (ISAs)

Anyone who is a taxpayer and particularly those who are higher rate taxpayers should seriously consider ensuring that they use as much of their ISA annual investment allowance as possible.  This may mean reviewing your position and making any ‘top-up’ investments before 5 April.

The maximum allowance for 2015/16 is £15,240 which can be paid into one cash ISA and/or one stocks and shares ISA in the tax year.

Gift Aid Payments

Don’t forget that, in respect of the 2015/16 tax year, higher rate taxpayers can claim an extra 20% of the ‘grossed up’ donation from H M Revenue & Customs (HMRC) for donations made during the tax year.  For example, if a donation of £80 is made to charity under gift aid during the year, the higher rate tax relief that HMRC will give you will be 20% of £100 i.e. an additional £20.  For additional rate taxpayers (those with taxable income above £150,000 for the year), the extra relief would be £25.

Pension Contributions

Although nothing has been announced as yet, it is being widely speculated that tax relief on pension contributions could be changed and many commentators are expecting the Chancellor to make such an announcement in the Budget on 16 March.  One train of thought is that higher and additional rate tax relief on pension contributions could be scrapped altogether and a new flat rate of tax relief introduced.

We will have to wait until 16 March to know for sure but you may want to take action before that date in case any changes come into effect immediately after the Chancellor’s statement.  If your total income for the current year may take you into the 40% income tax rate (for most individuals that is at a level of income including interest from savings, etc., of about £42,400), as things stand, any personal pension contributions you make before 5 April 2016 will attract higher rate tax relief.

At present, the tax relief for personal pension contributions works in a similar manner to gift aid payments as mentioned above and as a result, tax relief is available at your marginal rate of tax.

Dividends

Significant changes to the way in which dividends are taxed are being introduced with effect from 6 April 2016.  The ‘notional’ 10% tax credit on dividends is being scrapped and a new dividend allowance is being introduced, taking the form of a 0% tax rate on the first £5,000 of dividend income per tax year. 

For those individuals who receive more than £5,000 of dividend income in a tax year, there will be a tax rate of 7.5% applied to dividends above that amount (where dividend income falls within the basic rate tax band).  That rate increases to 32.5% for dividend income within the higher rate tax bracket and 38.1% for income above the additional rate band.  Dividends received on shares held in an ISA will continue to be tax free.

These changes will affect a number of people; some will be better off and some worse off.  Those particularly affected by the changes are the owner managers of small companies, many of whom have historically received a relatively small salary from their companies with the balance of their income coming from dividends.  Although each individual’s circumstances will differ, many in this position will be worse off after 5 April and they may want to consider matters before then as there may be steps they can take to make the most of the current lower rate of tax on dividends.

The above are only a small selection of some of the tax planning points included in our annual publication, Financial Perspectives – End of Tax Year Guide Spring 2016 available to anyone who would like to telephone our offices or e-mail us at mail@pearsonmay.co.uk.  Copies of this will be provided free of charge.

The above is for general guidance only and no action should be taken without obtaining specific advice