Professional Renaissance Limited is a limited company registered in England under company number 6380089. Our registered office address is: The Business Store, 98-100 High Road, Rayleigh, Essex, SS6 7AE.
Tax year end 2016
The Budget 2016
Tax dates 2016/17
Making use of current exemptions, and understanding the impact of new allowances from April, can help cut your tax bill.
The end of the tax year is the deadline for using valuable tax-saving exemptions that would otherwise be lost. Whether your aim is to reduce the burden of Inheritance Tax on your estate, or to ensure your savings and investments are arranged in the most tax-efficient way, there are some key opportunities that you shouldn’t overlook.
Use it or lose it
Gifting away assets during your lifetime is one effective way of reducing the value of your estate. There are a number of exemptions which, whilst appearing small in isolation, can produce significant savings and benefits if used consistently over the years. It also has the advantage of enabling you to see your wealth being enjoyed during your lifetime.
All individuals have an annual exemption of £3,000 each tax year, which can be divided up for any number of beneficiaries. It is also possible to use the previous year’s exemption if it is unused. This means that, between couples, there could be up to £12,000 available for immediate gifting, maybe to fund contributions to a Junior ISA for children or grandchildren.
One levy that is often overlooked is Capital Gains Tax, which actually raises more revenue than Inheritance Tax. In the last tax year, HM Revenue & Customs collected £5.5 billion in CGT, against £3.8 billion in IHT¹.
Each individual has an annual exemption which means they can make gains of £11,100 in the current tax year before paying CGT. Gains above that level are charged at 18% for basic-rate taxpayers and 28% if you pay tax at the higher rate.
By realising gains up to the limit and reinvesting the proceeds into an ISA, investors can shelter future gains from CGT. Spouses and civil partners should also consider transferring assets between them to benefit from both partners’ CGT allowance.
April sees the introduction of some big changes to personal taxation that will have a significant impact on savers and investors.
The new Dividend Allowance will enable individuals to receive dividend income of £5,000 tax-free, regardless of their other income. Sums above that will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
The Chancellor expects this measure to generate extra tax receipts of £2.5 billion in the first 12 months. Whether individuals will pay more tax as a result will depend on their own circumstances. Basic-rate taxpayers who receive more than £5,000 in dividends will be worse off, but higher-rate taxpayers with dividend income below that level will gain – currently they pay 25% on the whole sum.
The new regime again underlines the value of maximising the use of ISAs, on which there is no further tax liability on income. Individuals should ensure their investments are arranged to fully utilise their annual tax-free allowance, and couples should consider whether it would be beneficial to transfer assets to the other spouse.
The Treasury claims that the introduction of the Personal Savings Allowance in April will take 95% of savers out of paying any tax on their savings. The new allowance is completely separate from the personal allowance all taxpayers get on their income. It will allow basic-rate taxpayers to earn tax-free interest of up to £1000 on standard current and savings accounts. The allowance for higher-rate taxpayers will be £500. When the new allowance starts in April, tax will stop automatically being deducted at source by banks.
At the current average instant access rate of 0.48%², a basic-rate taxpayer could deposit over £208,000 in a regular savings account and receive all their interest tax-free. For higher-rate taxpayers the figure is just over £104,000.
The primary role of cash is as a home for emergency funds. It seems unlikely that many people would need a larger emergency pot than they can now save tax-free in an instant access account.
Therefore, one of the key issues for savers to consider is whether cash remains an appropriate use of their ISA allowance.
¹ HMRC, January 2016
² Bank of England, January 2016
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.