As the old joke goes...what's the difference between tax avoidance and tax evasion? About 5 years at Her Majesty's pleasure!
As we have just moved into a fresh tax year, I wanted to share some top tips to make your tax planning more effective - avoidance not evasion!
1 Check your tax code - Your tax code determines your take home pay and whilst ‘wrong’ codes will eventually work themselves out (when your employer submits your next P60, or if you complete a Self Assessment return) in the meantime you may be paying too much tax. If your current code is not 1100L, do you understand why? If not, check with your Tax Office or your Payroll colleagues may also be able to help.
2 Use the new tax-free savings allowances - From April 2016 interest from banks, building societies, gilts and corporate bonds will be paid without deduction of tax.
Those whose total income is below £17,000 a year won’t have to pay any tax on savings income. This is because they’ll benefit from the £11,000 personal allowance, the tax free starting rate on savings income of £5,000 and the personal savings allowance of £1,000.
The personal savings allowance allows anyone earning below £43,000 — the point at which higher-rate tax starts — to have £1,000 in savings income tax-free.
Those with earnings from £43,001 to £150,000 will have a £500 allowance.
Anyone earning more than this, and paying the 45 per cent tax band, has to pay tax on all their savings income.
From 6 April 2016 everyone has a Dividend Allowance of £5,000. Dividend income up to £5,000 is tax free. Dividend income in excess of £5,000 is taxed at 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for an additional rate taxpayer.
Apply for the transferable tax allowance
A spouse or civil partner who has income that is less than their personal allowance can transfer up to £1,100 of their allowance to their partner, as long as their partner is a basic rate taxpayer. This can result in a tax saving of £220 to the taxpayer. To register go to www.gov.uk/marriage-allowance.
3 Use your annual personal tax allowances - with a personal income tax allowance of £11,000, an ISA allowance of £15,240 and a capital gains tax allowance of £11,100 ensuring you use these each year will provide you with the simplest and most widely available tax planning. Apply this to every adult in your family and that widens the planning - although if you need to transfer ownership of any asset to other family members you will lose control of that asset.
4 Apply for and use the tax reliefs available to you - unlike tax allowances, tax reliefs must be applied for and granted. Make sure you know which reliefs are available to you and how to apply.
5 Keep a share log - If you regularly buy and sell shares or if you participate in your employer’s share plans (save as you earn or share incentive plans) it is recommended that you keep a log of the date, price and amount of all shares you acquire and those you sell. It is your responsibility to maintain this evidence to support any reporting of capital gains and capital losses.
6 Report capital losses to HMRC - If you sell a capital asset (shares, investments, property, art etc.) at a loss (compared to the price you bought it for) this is a capital loss and should be registered with HMRC. Capital losses can be carried forward indefinitely to offset against any future capital gains you may have, so reducing your potential liability to capital gains tax as long as you have notified HMRC within four years of the loss being incurred.
7 Consider the ownership of assets - A transfer of assets between spouses/ civil partners is free of income and capital gains taxes. In general, as part of tax planning strategies, assets should be owned by the partner who pays the lowest rate of income tax.
A higher rate tax payer will pay more capital gains tax than a basic rate taxpayer, so if a taxable gain is made, it is better that the asset is owned by the partner who pays the lower rate of tax. However, a taxable gain can often be avoided altogether if ownership of the asset is split or joint, since each partner has a capital gains allowance.
However, it is worth emphasising that to use these tax planning strategies the assets must transfer to the ownership of your spouse/ partner so you will no longer have any control over how they are used or disposed of.
8 Don't make investment decisions purely for tax purposes - Remember that with all financial planning, including tax planning, it should match your needs, your circumstances and reflect your attitude to risk. Don’t choose to implement a tax planning strategy that does not match your risk tolerance. For example, if you are risk averse, Venture Capital Trusts have no place in your plans despite their tax efficiency. Your investment strategy should be determined first and then you should look to make your investments tax efficient. Don’t make investments solely based on their tax efficiency – they need to match your overall investment strategy first and foremost.
Britain’s to blame for the tax haven monster My introduction to tax havens came in a grotty tavern somewhere on the Caribbean coast of central America. Slouched at the bar was an American bragging that he had a yacht moored in the marina. Given that we were in a dingy town in a developing country, I scoffed loudly. Half an hour later I found myself on a small dinghy heading out with him into the bay. We turned into a cove and I saw what could only be described as a mega-yacht.Why had he sailed his boat to this benighted place, I asked. Wouldn’t he have been better off mooring it off the Cote d’Azur or St Lucia? “No,” he replied. “This is where we come to park our money.” We were in Panama.