The most common form of taxation for individuals is income tax, and the rates applied can be punitive. However, there are still strategies available which can eat away at the amount of income tax to which you would otherwise be liable.
INCOME TAX RATE BANDS
For background, the amount of income tax you pay is determined by the quantum of your taxable income. The current rate bands for income tax are as follows:
|Income||First £50,000||£50,000- £150,000||Over £150,000|
Spouses are taxed independently (when any reference is made to spouses or married couples, this also includes civil partnerships).
YOUR BRIGHTERTHINKING NEXT STEPS:
“Consider making use of lower rate tax bands, and review tax implications of transferring income producing assets, but taking note of anti-avoidance and settlements legislation.”David Truman – Private Client Partner
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Married couples should utilise each person’s personal reliefs, as well as their starting and basic rate tax bands.
It may be beneficial to consider gifts of income producing assets (which must be outright and unconditional) to distribute income more evenly
For example: a saving of up to £12,500 in income tax per tax year could be achieved by the transfer of assets (that produce £40,000 of income per year) from an additional rate (45%) taxpayer to their non-earning
Income from jointly owned assets is generally shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election (that needs to be filed with HM Revenue and Customs), is made to split the income in proportion to the ownership of the asset. Without the election being filed, the income will automatically be split 50:50. When the circumstances fit, we can assist with the advice and an election.
The first £12,500 of a taxpayer’s income is generally tax free by virtue of the personal allowance. It is important for individual taxpayers to make use of the personal allowance each tax year because it cannot be carried forward.
Where you are a basic rate taxpayer and your spouse does not pay any tax, it should be possible to transfer an element of the personal allowance. To action this, it is necessary to complete a specific claim – something that Menzies can manage on your behalf.
For those with incomes in excess of £100,000, the personal allowance (of £12,500) begins to be withdrawn at a rate of £1 for every £2 of income above £100,000. The impact is punitive with a 60% effective tax rate for
income between £100,000 and £125,000.
Additionally, those with incomes of over £150,000 will be subject to the additional rate of tax (45%).
In these instances, you may wish to consider if there are any income tax deductions which can be claimed to reduce your income. These could include donations under Gift Aid, transferring income to others or by
making pension contributions.
DIVIDEND NIL RATE BAND
The first £2,000 of dividend income received in the tax year is FREE of
income tax. Dividends received over and above the £2,000 tax free dividend
allowance are subject to their own rate tax rate bands:
Basic rate – 7.5%
Higher rate – 32.5.%
Additional rate – 38.1%
If you own shares in a family company, you may wish to consider who else in your family could have shares. It is possible to have different shares issued with different rights (e.g. dividend only shares or non-voting shares).
Be warned as careful planning is required to ensure you do not fall foul of the HMRC anti avoidance regulations.
SAVINGS NIL RATE BAND
For basic rate taxpayers, there is a savings nil rate band of £1,000, which means the first £1,000 of savings income is taxed at 0%.
For higher rate taxpayers, the savings rate band is £500, and for additional rate taxpayers (i.e. taxable income over £150,000) it is withdrawn altogether.
The savings nil rate band is not transferable between spouses, so it is important to ensure that bank accounts are held to maximise the nil rate band.
THE STARTING RATE FOR SAVERS
Where a taxpayer has relatively modest non-savings income (e.g. employment, pension or income from property), they may be entitled to the £5,000 starting rate for savings allowance making this income tax free.
The starting rate for savings applies before the nil rate band. By careful planning – and where you have your own company – you could hypothetically extract £20,500 tax free, which can be broken down as follows:
• Personal allowance – £12,500
• Starting rate for savings – £5,000
• Savings nil rate band – £1,000
• Dividend allowance – £2,000
When considering profit extraction, timing is critical as it can have significant consequences on what tax is payable and when. We would strongly recommend seeking professional advice as there could be merit in deferring income to a later year.
ALLOWANCES – CHILDREN
Children have their own allowances and tax bands. It may be possible for tax savings to be achieved by the transfer of income producing assets to a child.
Generally, this is ineffective if the parent puts aside funds for their minor child (as the income remains taxable on the parent unless the income arising amounts to no more than £100 gross per annum). However, it may be relevant to parents with adult children or for grandparents who wish to make gifts to their grandchildren (even if minors). Bare Trusts could be established to provide for grandchildren’s childcare and schooling costs, making use of the grandchildren’s own income tax and capital gains tax allowances.
CHILD BENEFIT TAX CHARGE
For those with income over £50,000, or who are part of a couple where one of you earns over £50,000, then part or all of the Child Benefit claimed will be clawed back.
If your income is over £60,000 you may therefore consider disclaiming Child Benefit to avoid a claw back tax charge. However, if the claimant of child benefit is not themselves working, then disclaiming it will mean the year does not qualify for State Pension purposes. In this scenario you should just ask for payment to be stopped rather than disclaiming it altogether
PAYE NOTICES OF CODING
Where you are employed, or have a pension, it is worth checking your PAYE Notice of Coding to ensure your allowances are correctly stated. This includes relief for pension contributions, charitable donations and any other tax reliefs.
HMRC’s coding system has, in our experience, led to many incorrect coding notices. If the coding is wrong, many taxpayers could end up with an unwanted, and unexpected, tax bill after the end of the tax year. If you’re in any doubt then Menzies can review your PAYE Notice of Coding to ensure it is reasonable and in line with your income.
In recent years, the Chancellor of the Exchequer has targeted individuals with second properties, and specifically buy-to-let landlords. This has included the introduction of increased Stamp Duty Land Tax, the restriction on expenses which can be set against rental profits and a hike in capital gains tax rates.
Probably the most controversial was the introduction (from 6th April 2017) of the finance costs restriction. Where it was previously possible to claim 100% tax relief on the finance costs of any loan associated with the rental, this is being replaced by a tax reducer over a four year period. Items which are included under finance costs include mortgages, loans (including loans to buy furnishings) and overdrafts.
For the 2019/20 tax year, the restriction that applies consists of 25% of the total finance cost being allowable as a deduction against rental income, and the balance claimed as a tax reducer. This reducer is given in the form of a 20% reduction based on the lower of: 75% of the finance cost; property profits or adjusted total income exceeding the personal allowance.
Therefore individuals with one or more buy-to-let properties may need to review their position and consider the initial and long-term impacts this may have on their property income and tax liability.
For those who have significant rental property businesses which are not currently structured as a company, there may be merit in considering doing so. We can quantify the benefit and implement the appropriate structure.
There is, however, light at the end of the tunnel and some tax breaks still available. For example, the landlord’s energy saving allowance allows individuals to claim immediate income tax relief for qualifying expenditure of up to £1,500 per rental property per tax year.
If you rent a room in your main residence, the first £7,500 in rental income is tax free. This is called the “rent a room” allowance, and where you own a property jointly, the allowance is split.
Finally, if you have a Furnished Holiday Letting (FHL), you may qualify for some generous tax breaks, including obtaining full tax relief for interest on loans attached to the property, and a capital gains tax rate of 10% on eventual sale.
Specific conditions need to be satisfied to qualify as a FHL, and professional advice is strongly recommended.
Should you wish to pursue one or all of these property tax breaks, an informal discussion with one of our specialist property team members is a great first step to understand what opportunities may be available and your immediate next steps.
With effect from the 22nd November 2017, first time buyers paying £300,000 or less for a residential property will pay no SDLT.
First time buyers paying between £300,000 and £500,000 will pay SDLT at 5% on the amount of the purchase price in excess of £300,000. First time buyers purchasing property for more than £500,000 will not be entitled to any relief.
GIFTS TO CHARITY
Charitable donations made under the Gift Aid scheme can result in significant benefits for both the donor and the charity. It is important to keep a record of any charitable payments on which you wish to claim tax relief, as HMRC may request evidence.
A cash gift of £80 will generate a tax refund of £20 for the charity so that it ends up with £100. The donor will get higher rate tax relief of £20 so that the net cost of the gift is only £60. Where the 45% additional rate of tax applies, the net cost of the gift in this example would be only £55.
Care needs to be taken in claiming gift aid if you are a low earner and can create an unexpected tax charge if you gift funds which fall within your personal income tax allowance.
In addition, tax relief against 2019/20 income is possible for charitable donations made between 6 April 2020 and 31 January 2021. This is provided that the payment is made before filing the 2019/20 tax return.
For larger charitable donations, it may also be possible to make gifts of quoted shares and securities or land and buildings to charities and claim income tax relief on the value of the gift.
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Menzies Private Client Team
Personal tax planning can be complex. We would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively. Please do speak with your Menzies contact who will be delighted to meet with you to discuss ideas, opportunities and the appropriate action.