2018/19 Tax year-end – the benefits to consider
Mar 08, 2019
Key Dates Tax Tips
As is often the case, there are a number of matters you should take into account before the end of the current tax year, bearing in mind there are some important changes being introduced in the next tax year. Here we take a look at some of these important considerations.
Don’t lose your personal allowance!
If your adjusted net income exceeds £100,000, then your £11,850 personal allowance is reduced by £1 for every £2 you earn above this limit. This restriction applies between £100,000 and £123,700 of adjusted net income. Pension contributions and Gift Aid can help to reduce your adjusted net income to keep it under £100,000, and therefore save you tax at an effective rate of 60%.
Another way that you could avoid this trap would be to agree with your employer to sacrifice some of your salary in exchange for a tax free benefit in kind. Salary sacrifice rules changed on 6 April 2017, but employer pension contributions, bicycles, and employer provided childcare continue to be tax effective.
Year end pension planning
For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on their earnings. This limit covers both contributions by the individual and their employer.
Note that the unused allowance for a particular tax year may be carried forward for three years, and can be added on to the tax relief for the current year, but it then lapses if it’s unused. Hence any unused pension allowance for 2015/16 will lapse on 5 April 2019 if still unused. If you’re a higher rate tax payer, it’s important to be aware that under current rules the net post-tax cost of saving £10,000 into your personal pension is only £6,000, but there continue to be rumours that this generous relief may be reduced in future.
Have you used your 2018/19 ISA allowance?
Your maximum annual investment in ISAs for 2018/19 is £20,000. Your investment needs to be made before 6 April 2019. In addition, have you thought about investing for your children or grandchildren by setting up a Junior ISA? In the 2018/19 tax year, you can invest £4,260 into a Junior ISA for any child under 18.
Consider other tax efficient investments
If you are looking for investment opportunities, have you considered the Enterprise Investment Scheme (EIS)? These investments in certain qualifying companies allow you to off-set 30% of the amount invested against your income tax bill, as well as offering the ability to defer Capital Gains Tax (CGT) until the shares are sold.
An even more generous tax break is available for investment in a qualifying Seed EIS company, where income tax relief is available at 50% and it’s also possible to obtain relief against your 2018/19 capital gains. Both EIS and Seed EIS also provide a CGT exemption when the shares themselves are sold after 3 years. Do be aware however that qualifying EIS and Seed EIS companies tend to be risky investments, so professional investment advice should be taken.
A 30% income tax break is also available by investing in a Venture Capital Trust.
Year end capital tax planning
Have you used your 2018/19 £11,700 annual capital gains exemption? If you have any shares where the gain is less than £11,700, then it’s worth considering selling them before 6 April 2019. In addition, if you have any worthless shares, consider a negligible value claim to establish a capital loss. Under certain circumstances you may even be able to off-set that capital loss against your income, which could save income tax of up to 45% of the loss.
As far as Inheritance Tax (IHT) planning is concerned, all individuals have a £3,000 annual allowance which means that gifts up to that amount each year are exempt from IHT. If you haven’t yet used your £3,000 allowance from 2017/18, then you can make gifts of up to £6,000 before 6 April 2019 without the gift being liable to IHT. You might also consider making regular gifts out of your income, to minimise the growth of your estate which will be liable to IHT. Gifts out of your surplus income are not subject to IHT if properly structured, and we can help you with keeping the necessary documentation.
New workplace pension limits from 6 April 2019
The amounts that employers and workers will be required to pay into workplace pensions are due to increase from 6 April, unless the worker opts out. The new limits will be 5% from the worker and 3% from the employer. The total minimum contribution will therefore increase from the current 5% overall to 8% overall.
In some schemes, your employer has the option to pay in more than the legal minimum amount. In these schemes you can pay in less as a worker, as long as your employer puts in enough to make up the difference and still meet the total minimum contribution of 8%.
Buy new equipment before 6 April?
It is your business year end date, and not 5 April, which is relevant for capital allowances purposes. If, however, you are running a business and making up accounts to 31 March or 5 April, you may wish to consider buying plant and machinery to take advantage of the Annual Investment Allowance (AIA). Note that the AIA was increased from £200,000 to £1 million on 1 January 2019, so the allowance for year ending 31 March 2019 would only be £400,000, not the full £1 million (£200,000 x 9 months in 2018 + £1 million x 3 months of 2019).
The AIA provides a 100% tax write-off for equipment used in your business. This tax relief extends to fixtures and fittings within business premises such as electrical, water and heating systems. AIA does not apply to motor cars, but there is a special 100% tax relief available if you buy a new car which emits no more than 50g CO2 per kilometre.
If you would like to discuss taking advantage of any of these options before 6 April please do give us a call. This is only a brief summary of the various tax planning options available, and we do recommend you discuss the detail with us in order be sure how they could apply to you.