As always at this time of year, it is advisable to review your tax affairs, making the most of opportunities to maximise your income and minimise your tax. Some tax planning may require action to be taken before 5 April. I will highlight below a few of these:
Gift Aid Payments
Don’t forget that, in respect of the 2018/19 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 2019, 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 just over £46,000. 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 2018/19 will lose the whole or part of their personal allowance of £11,850. 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 £123,700. Once net adjusted income reaches £123,700 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 2019 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 2018/19 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 2019, 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.
Small gifts of up to £250 to each of as many individuals as the donor wishes to benefit can be made. This allowance cannot be used to cover part of a gift or gifts totalling more than £250 to the same individual during the same tax year.
If you wish to make use of the annual inheritance tax gifts allowance for larger gifts not covered by the above exemption, up to £3,000 can be given in total to all recipients for the year ended 5 April 2019. If the allowance was not used for the year ended 5 April 2018, that can also be utilised for gifts now, i.e. up to £6,000 could be gifted if there have been no earlier gifts in the last two years. This could save up to £2,400 of inheritance tax.
Furthermore, recurring gifts which form part of normal expenditure out of surplus net income may be made in addition to the above. This can be an extremely important relief that is often overlooked. You must however maintain careful records of your gifts and expenditure in order for your executors to be in a position to prove that you were able to maintain the same standard of living after making the gifts. If your Income Tax Returns and tax calculations are retained, clearly, they will go a long way to providing details of your taxable income.