Fancy a break this spring?
This year more than ever, when money is tight and individuals and businesses are looking for ways to cut costs, one of the ways of achieving this is to use every tax break available.
Bear in mind that I don’t just mean that you can save on your income tax but you may also be able to benefit in the longer term as well.
So, on to the detail. First let’s look at the various allowances that can help but that are relevant mostly to married couples and registered civil partners.
The first matter is of course income tax and it is important to make use of the standard allowance of £6,035 for 2008/09 and £6,475 for 2009/10.
Couples over the age of 65 should ensure they take advantage of the relevant, additional, age-related allowances.
However if either income is in excess of £22,900 then the age-related allowances will be reduced.
Above all, when one person is a higher rate taxpayer and the other a basic rate taxpayer you should ensure that, where possible, these allowances are used.
It might also be worth looking at your investments, with a view to rebalancing who owns what, so that any tax on income or dividends can be minimised. Another reason for this is to minimise any Capital Gains Tax (CGT) on realisation of a profit on eventual sale of the asset.
CGT is currently set at 18% and if you are about to sell an asset make sure that both of the couple’s annual £9,600 allowances are used.
Remember that transfers between partners are on a no loss, no gain basis. I realise that many assets are showing a huge capital loss at this time. So why sell now?
Unlike the CGT allowance, any losses on an investment can be carried forward. So it is worth considering selling to create a loss that can be used later on to reduce the CGT that you may incur when selling an asset in better times.
Next, how can we reduce what income tax we pay? There are three basic tools for this:
1. Venture Capital Trusts with relief of 30%
2. Enterprise Investment Schemes with relief of 20%
3. Pensions with relief up to 40%.
There is not sufficient space to go into all of these in detail. But, the first two require investors with a high risk tolerance.
And as regards pensions, we each have an annual allowance of £235,000 in the current year. You can, in theory, put more in than this although there are huge penalties.
However, if careful attention is paid to input periods, you can in fact put in more than the annual allowance and at the same time avoid these penalties.
The next thing to check up on is maximising your tax-free savings. The most popular is the Individual Savings Account (ISA), which allows £7,200 for each person over the age of 18.
It is a little known fact that young people between the ages of 16 and 18 can invest up to £3,600 in a cash ISA. This can be used as a very tax-efficient planning tool by the canny parent. They can give this amount to the child annually, as an inheritance tax-free gift, thus making it a very cost-effective tool for saving towards university fees or helping them to build up a lump sum for their first home.
Reverting to full stocks and shares ISAs for a moment, many investors feel a little panicky about these, but I would suggest that even if we are not at the very bottom of the markets, this is not the time to forgo your ISA allowance.
If you invest monthly you will benefit from buying the units cheaply so that, when the markets do rise, you will benefit without having to rebuild your investment strategy.
I will finish by stressing that you should take appropriate advice from your accountant in respect of your tax affairs.
All I am attempting to do here is to offer some ideas to bring up at that meeting. If you need to know more on the pensions side you can contact me via the website.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk.