End-of-year tax planning: a checklist

Eight things to check before the end of the financial year
by Heather Connon

‘Use it or lose it’ may usually be applied to physical health but it can equally apply to tax bills. As the end of the tax year approaches, it is time to make sure that clients are making full use of all the exemptions and incentives available. 

Danny Cox CFPTM Chartered MCSI, head of communication at Hargeaves Lansdown, says a good way to start is to analyse the past year’s tax bills, assess where the tax charges fell and consider whether there are ways to reduce the sum paid. Here, we provide a checklist of the eight places to look. 
1. ISAsThe experts agree that this is the first place to start: every adult can put £20,000 a year into an ISA, so couples can shelter £40,000 a year from tax on dividends and on gains when funds are withdrawn. Using the full allowance every year can build into a sizable fund. There are now five types of ISA: Lifetime ISA; Junior ISA; Help to Buy ISA; Innovative Finance ISA; and the standard ISA – so deciding which is best will depend on the age and circumstances of the client.   
2. PensionsNowhere is the ‘use it or lose it’ advice more pertinent than for pension contributions. While tax relief on pension contributions has been eroded in recent years, they remain the most tax effective way of saving for retirement, with the government contributing up to 45p to every pound of savings.

Neil Messenger, partner and head of wealth advisory at Grant Thornton UK, points out that pension tax relief currently costs the government an estimated £50bn – enough to cut the basic rate of tax to 10%. He believes the Government's aim will be to reduce that cost, making it imperative to use the allowances while you can. The annual limit is £40,000 but is gradually removed from those earning more than £150,000, falling to just £10,000 for salaries over £210,000. 

Tax relief can be carried forward for three years. Nimesh Shah, a tax adviser at Blick Rothenberg, advises checking back for unused allowances before they disappear. He adds that it is also essential to check the current and prospective value of the pension pot to ensure that it will not breach the £1m lifetime allowance. This will rise to £1.03m in 2018/19, the first increase in seven years. 

Neil also advises checking the wording of the policies for death-in-service benefits to ensure that these are not paid into the pension scheme. This would risk breaching the lifetime allowance and triggering a 55% tax charge. 

There are two essential year-end tasks for pension planning:
  1. Ensure that the current pot will not exceed the lifetime allowance, which is currently £1m but which will increase with consumer price index inflation each year.
  2. Ensure that the annual allowance of £40,000 is fully utilised. The allowance can be carried forward three years, so check previous years to ensure that contributions are not wasted.
3. Tax thresholdsIncome over £150,000 is charged at the additional rate of 45%, but the personal allowance is gradually withdrawn on earnings over £100,000 – leading to an effective tax rate of 60% between £100,000 and £122,000, according to research by Mazars. It is therefore worth considering ways to keep taxable income below that level, including pension contributions, salary sacrifice or deferral of bonuses, and transferring income-producing assets to lower-earning spouses. 
4. Dividend allowanceFor the 2017/18 tax year, £5,000 of dividend income can be received free of tax. Next year, that will fall to £2,000; so, if possible, ensure that dividends are received in this year rather than next.
5. Capital Gains Tax (CGT) allowancesThe annual exemption of £11,300 – rising to £11,700 next year – cannot be carried forward. Consider asset sales this year to use up the allowance, or crystallising losses on assets which have fallen in value to reduce this year’s bill. The rate is 10% for basic rate tax payers and 20% for those on a higher rate, so consider transferring assets between spouses to make full use of both allowances and the lower rate bands. 
6. Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs)These high-risk vehicles give tax relief at 30% on investments of up to £1m for EISs and £200,000 a year for VCTs, provided they are held for three years and five years respectively. From 2018/19, the maximum investment into an EIS is being raised to £2m, but the rules are being tightened to encourage more investment in technology and less into relatively low-risk funds. 

There is no CGT on sale if they have been held for the required period, although they are generally illiquid assets with limited marketability. Nimesh says these can be useful alternatives for building up retirement savings for those who have exceeded the annual or lifetime pension limits.
Note: This article is a general guide. Anyone reading this who is taking action on one of the more complex areas, such as pensions, should ensure that they have, where necessary, taken appropriate and expert advice before any major steps are taken.  7. Inheritance tax (IHT)Make use of exemptions such as the £3,000 annual exemption and a similar sum for gifts. There is no limit on gifts made out of income so, Danny says, it is worth establishing a regular pattern of gifting by those with a healthy income to avoid future IHT liability. 
8. Charitable givingDonations to charities can be offset against tax under the Gift Aid scheme, which can be a useful way to keep income below tax thresholds or to reduce the overall bill.

Seen a blog, news story or discussion online that you think might interest CISI members? Email jake.matthews@wardour.co.uk.
Published: 15 Dec 2017
  • Analysis
  • Financial Planning
  • The Review
  • Tax
  • Pensions
  • Investments
  • capital gains tax

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