Tax E-News March 2016

INCREASE YOUR WEALTH

Watch our 30 minute tax planning video, packed full of tips and ideas to save tax and increase your wealth. 14 actions to consider as well as how to pay no tax on income of nearly £70k p.a.

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CONSIDER PAYING DIVIDENDS BEFORE 6 APRIL 2016

Something that we have mentioned in previous newsletters for those running their own companies is to consider paying dividends before 6 April 2016 when the new system of dividend taxation starts. Although the first £5,000 of dividends will be taxed at 0% from 2016/17, once that has been used up there will be a 7.5% across the board increase in the rate of tax on dividends. Please contact us to arrange a meeting to discuss this further.

YEAR END PENSION PLANNING

Take advantage of the pension carry forward rules in order to benefit from any unused allowances from the previous three tax years. This is generally the difference between the old £50,000 annual pension allowance and your pension input that year and can be added to your relief for 2015/16. Note that the annual pension allowance is £40,000 for 2015/16 and 2016/17, although those individuals with income over £150,000 will have their annual pension allowance reduced by £1 for every £2 over £150,000 in 2016/17.

To avoid losing pension relief brought forward from 2012/13 which lapses 5 April 2016, consider making an additional pension payment before 5 April 2016. If your pension input was £24,000 in 2012/13 then there is £26,000 unused relief available to add to your 2015/16 allowance. You would need to make gross pension contributions of at least £66,000 (£40,000 plus £26,000) to avoid losing this generous relief.

WILL PENSION TAX RELIEF CHANGE AGAIN ON BUDGET DAY?

There has been a lot of speculation that the Chancellor may announce further major changes to tax relief on pension contributions in his March Budget, based on consultations with the pensions industry.

Under the current rules an individual’s contributions can save them tax at their highest marginal rate and also help them avoid losing their personal allowance (see above). So a £8,000 pension contribution by a higher rate taxpayer results in £2,000 (20%) being added to their fund by HMRC = £10,000 gross. The £10,000 gross contribution would then save a further £2,000 in tax, so the net cost would be just £6,000 if they are a higher rate tax payer.

It is understood that the Government is considering introducing a flat rate of pension tax relief of between 25% and 33%, which would be good news for basic rate taxpayers, but higher rate taxpayers would lose out. If say a 30% rate of relief was to introduced, a £7,000 contribution would be topped up to £10,000 with no further relief. It has also been suggested that if may not be possible in future to agree with your employer to sacrifice part of your salary in exchange for an additional tax free employer pension contribution. The starting date of these possible changes in uncertain but they may be effective from Budget Day – 16 March 2016.

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 set off 30% of the amount invested against your tax bill as well as capital gains tax (CGT) deferral. An even more generous tax break is available for investment in a qualifying Seed EIS company where income tax relief at 50% is available and in addition it is possible to obtain relief against your 2015/16 capital gains. Both EIS and Seed EIS also provide a CGT exemption when the shares themselves are sold after 3 years. Note however that qualifying EIS companies tend to be risky investments so professional advice should be taken.

A 30% income tax break is also available by investing in a Venture Capital Trust.

TAX DIARY OF MAIN EVENTS