To the surprise and relief of most in the tax profession, the 2017 Autumn Budget (which took place in November 2017) was a relatively gentle affair. At the time of writing, the Spring statement on 13 March has not yet taken place but it will be issued in response to the Office for Budget Responsibility’s forecasts and is not intended to be a major event.
One of Philip Hammond’s objectives in moving the Budget from Spring to Autumn was to provide taxpayers and businesses with more certainty of any changes to the taxation system well in advance of the start of the new tax year. Even though the end of the current tax year is less than a month away, there will still be opportunities for many taxpayers to minimise the tax they pay this year, some of which may require action to be taken before 5 April. I will highlight below a few of these:
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 2017/18 is £20,000 of which £4,000 can be saved into a Lifetime ISA and the balance can be paid into one cash ISA and/or one stocks and shares ISA in the tax year. ISAs are still worth considering for basic rate taxpayers, but the tax advantage is obviously not so great.
GIFT AID PAYMENTS
Don’t forget that, in respect of the 2017/18 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.
If you regularly make contributions to pension schemes, you may wish to consider a one off additional payment to be made before 5 April 2018, particularly if your total income for the current year may take you into the 40% (or even higher) income tax rates. For most individuals, the 40% rate starts to apply once income reaches £45,000.
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.
High earners also need to bear in mind that they may be at risk of losing their personal allowance. Those with “net adjusted income” in excess of £100,000 for 2017/18 will lose the whole or part of their personal allowance of £11,500. For every £2 of income in excess of £100,000 the allowance is reduced by £1, leading to an effective marginal rate of income tax of 60% in the band between £100,000 and £123,000. Once income reaches £123,000 the allowance is completely eliminated.
With both gift aid donations and pension contributions, it is certainly worth considering making a one-off payment before 5 April 2018 if you are in danger of losing all or part of your personal allowance, or being subject to the High Income Child Benefit Charge (which applies when “net adjusted income” exceeds £50,000).
The gross amount of any gift aid donations and pension contributions are deducted from total income when calculating “net adjusted income” for these purposes. For example, if you are expecting your total income for 2017/18 to be £110,000 (and assume for these purposes that you haven’t yet made any pension contributions in the tax year), by making a net pension payment of £8,000 before 5 April 2018, could save you additional income tax of £4,000, over and above the basic rate relief, meaning the effective cost (after tax relief) of the pension payment is actually only £4,000. In other words you obtain the benefit of £10,000 being contributed to your pension scheme at a cost of only £4,000 – a massive 60% relief.