45% tax and loss of personal allowance
The highest rate of tax remains at 45%, applying to individuals with total income over £150,000. Personal allowances are tapered for individuals with income between £100,000 and £125,000 (2019/20), giving an effective tax rate in this band of 60%.
The following can help reduce taxable income:
- Making pension contributions or charitable gift aid payments.
- Transferring income-generating assets between spouses/civil partners if possible.
- Using tax-free investments and/or tax efficient investments.
- Investing in assets which generate capital growth rather than income.
- Altering the timing of income to maximise use of lower rate bands.
There are various tax-free and tax-efficient investments available. For independent, fee-based advice on whether any of these investments are suitable for you, we can put you in touch with a contact in our financial services team.
- Consider making tax-free investments through ISAs or National Savings.
- The Help To Buy ISA for first time buyers provides those who save up to £12,000 toward their first home with a further 25% government bonus. For every £200 a first time buyer saves, the government will provide a £50 bonus, up to a maximum of £3,000.
- Make use of the annual ISA subscription (2019/20 limit £20,000). Consider Junior ISAs for children under 18.
- Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments provide tax shelter/deferral incentives.
Pension contributions annual allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of your annual allowance, or your net relevant earnings. It may also be possible to take advantage of your unused annual allowance from the three previous tax years. This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so you should seek advice before making any contributions.
Individuals have a starting rate band of £5,000 for savings income (subject to total income), and £2,000 for dividend income. Savings and dividend income falling within these bands is taxed at 0%. Separate to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers. Spouses and civil partners should review who holds any taxable savings.
Gift aid donations to charity give tax relief at your highest marginal tax rate. Any cash donations made before 31 January of the following tax year, or the date of the submission of your tax return if earlier, can be carried back to the previous tax year. Cash donations made before both 31 January 2020 and the submission of your 2018/19 tax return can be included on to your 2018/19 tax return.
Spouses should ensure that any charitable donations are made by the spouse with the higher income to maximise income tax relief.
Individuals can gift quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from Capital Gains Tax.
Capital Gains Tax
Subject to the availability of any reliefs, Capital Gains Tax is currently charged at either 10% or 20%, depending upon the marginal rate for the year of disposal, for all gains above the annual exemption (currently £12,000 in 2019/20 for individuals). Rates of 18% and 28% apply on gains arising on the disposal of investment residential properties.
Non-resident individuals and trustees selling UK land (directly or indirectly) may be required to file a return and pay any Capital Gains Tax within 30 days of the sale. The requirement to file a return may still apply even where no capital gain arises. From 6 April 2020, these rules will also apply to UK residents disposing of UK residential property at a gain.
Consideration should be given to selling assets at a gain to use your annual exemption. Assets could also be transferred between spouses where appropriate to maximise reliefs available.
Consideration should also be given to selling any assets which stand at a loss if you have large capital gains and also making a ‘negligible value’ claim on assets that currently have no value.
Both tax and investment advice should be taken in advance.
Making Tax Digital (MTD)
The Chancellor confirmed in the Spring Statement that the Government will not be mandating MTD for any new taxes or businesses in 2020, in order to focus on supporting businesses that are adopting MTD for VAT.
Trustees may want to review whether distributions should be made before 5 April 2020. Trustees may also wish to give consideration to the Capital Gains Tax annual exemption to determine whether any assets should be sold in the tax year.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.