FEBRUARY 2015 - Make the most of your tax planning opportunities before the year end
With the end of the tax year looming now is the time to consider your basic personal tax planning opportunities. Here we will look at changes to your personal allowance, pension contributions and Capital Gains Tax.
From 6 April 2015 the basic personal allowance (PA) will increase from £10,000 to £10,600, however, the basic rate band will reduce from £31,865 to £31,785. The effect of this is that individuals with income less than £100,000 (i.e. those who have their full PA) will not pay tax on an additional £520 in 2015/16.
The maximum amount of contributions that can be made in a tax year is equal to your relevant earnings in the tax year. Anyone can pay up to £3,600 regardless of their levels of earnings.
Where your total contributions in a tax year exceed the annual allowance, there could be an income tax charge. From 6 April 2014, the maximum amount of contributions that can be made tax free each year is £40,000. In prior years this limit was £50,000. Any unused annual allowance can be carried forward for 3 years in cases where the contributions exceed the annual allowance. Unused allowances can only be carried forward for a year in which the individual was a member of a registered pension scheme although there is no need for a contribution to have been made in this year.
When considering whether to make personal contribution before 5th April it is worth considering the effect this will have on your tax position. Depending on your level of earnings, these contributions can lead to eliminating or reducing any 40% income tax liabilities you may otherwise have had to pay. For those with earnings in excess of £100,000 per annum this may be particularly attractive. Personal allowances are lost at the rate of £1 for every £2 that your adjusted net income exceeds £100,000. Depending on the amount of pension contributions that are made, the overall tax effect can be a rate of tax relief of up to 60%.
Capital Gains Tax (CGT)
The current annual exemption allowance is £11,000 of gain for the 2014/15 tax year. If you are considering making sales that would take you over the annual exemption, if possible, it would be beneficial to consider realising any gains either side of 5th April and thus utilising your annual exemption allowance in both tax years.