Tax Experts Offer Tips As Deadline Approaches

The new tax year, starting on April 6 will bring changes to the way savings and dividends are taxed, and pension tax relief will be restricted for the highest earners.

Savers acting now can reduce the impact of some of some of these changes.

With the end of the 2015/16 tax year upon us, expert John Bunker from Thomas Eggar, part of the Irwin Mitchell Group, has offered some helpful advice on everything you need to do before midnight.

He said: “As we come to the tax year end, ensuring you make good use of exemptions and allowances, in each tax year, is increasingly important as taxpayers are squeezed in so many ways.”  

ISA Allowance 

Savers should top up their tax-free individual savings accounts (ISAs) as much as possible before their annual allowance of £15,240 expires at the end of the tax year.

The allowance is the maximum amount that can be saved in cash ISAs, stocks and shares ISAs or a combination of the two. 

John, who is a solicitor and chartered tax adviser, and Head of Private Client Knowledge Management at Thomas Eggar, said: “Many people forget that the allowance forms part of a ‘use it or lose it’ policy. It’s vital to put in as much as you can before the deadline because missing it means your unused allowance.

“If you can afford it, you should look to maximise this allowance and remember it also allows couples to save more than £30,000 a year, tax-free.

“Parents can also take advantage of tax free savings by opening Junior ISA accounts for their children, with limit of £4,080 to be invested in cash ISAs and stocks and share ISAs. The children will not have control of the account until they turn 16 and can only withdraw once they turn 18.”

Pension Contributions

The annual threshold that savers can invest in their pension pots before having to pay tax is generally £40,000.

Higher-rate taxpayers especially can benefit from this because, to an extent, pension contributions offer tax savings.

John, who has more than 25 years’ experience advising clients on tax, said: “Unlike ISAs, savers can top up their allowance for the current tax year with any unused allowances from the previous three years. So using a pension fund is a great way to make tax free savings.

“In some cases, taxpayers may be seeing their £40K annual allowance reduced to £10K and in such cases it is even more valuable to make use of any carried forward unused allowances. It’s always good to take advice from an independent financial planner in these cases.”

Inheritance Tax

One way savers can minimise or avoid inheritance tax later in the future is by making gifts of up to £3,000 every tax year.

The annual allowance allows parents to give money to their children without the concern surrounding inheritance tax. 

Estate planning, wills and trusts specialist John added: “In this situation the allowance can be carried over by one year, so if you haven’t used last year’s allowance you could carry it forward one year only. Do be careful, if trying to use this year’s exemptions, as gifts by cheque are not completed until the funds have cleared from the bank account. You can’t simply hand over a cheque. For any last minute gifts you need to gift cash or transfer funds by bank transfer.”  

Capital Gains Tax

The Annual Exempt Amount is a yearly tax-free allowance, which permits people to make a certain amount of capital gains before they have to pay tax.

The allowance for the current tax year is £11,100, while the CGT on any taxable gains is 18pc for basic-rate taxpayers, and 28pc at the higher rate, and investors only pay Capital Gains Tax if their overall gains for the year exceed this amount.

John said: “It may be worth banking some profits from portfolios or investments that have risen, before they become taxable. One way to do this is by selling them and take the profits of less than £11,100. You could use the proceeds to invest in similar shares or funds.

“It is not generally worth realising gains in excess of the exemption by 5 April, as the rate on any taxable gains is going down by 8% to 20% or 10% from 6 April, unless there is a special factor or change of circumstances between the two tax years. This reduction will not apply to residential properties. If in doubt, take specific advice.”

Review Your Assets

The end of the tax year is a great time for a Spring clean of your assets to make sure they are held in the most tax-efficient manner.

John said: “The ways dividends are taxed is changing this month, meaning that the first £5,000 of dividend income is tax free.

“Basic rate taxpayers will pay 7.5pc on excess dividends, and higher rates taxpayers will pay 32.5pc and additional rate taxpayers paying 38.1pc.

“It could be beneficial in the long run to take dividend payments before April 6 as this will impact those who hold income-producing funds, as well as people who run their own firms and pay themselves a dividend and a salary.”