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It seems that winter will merge into spring given the mild weather we have seen this winter and so as spring approaches the time is right to review your finances and consider whether a financial ‘spring clean’ is appropriate. The tax system has many allowances which refresh at the start of each tax year so before they are lost it is important to give things a shake and see what falls out.
From the start of the new tax year the personal allowance will increase to £8,105 reducing the tax burden for many and there will be further increases for those over 65 and 75. However, to ensure that higher rate taxpayers do not benefit from this increased allowance the point at which higher rate tax becomes payable will also fall to £34,370 with anyone earning more than this paying tax at 40%. Whether the 50% tax rate on income over £150,000 is retained will be decided in the budget on 21 March but it seems very likely to stay for now.
Individuals who just fall into one of these higher tax brackets should consider splitting some of their income with their spouse to take advantage of both their personal allowances and the lower 20% rate of tax. If one spouse’s income is lower it may be worth transferring investments between you meaning income is taxed on the spouse with the lowest income. There are some practical implications of gifting investments away so professional advice should always be sought.
Topping up your cash ISAs to take advantage of tax free savings up to £5,340 in the current tax year increasing to £5,640 after April is worth considering. Pension contributions should also be reviewed before the end of the tax year as these can be tax efficient and can be used to take you out of a higher tax band. Pension rules have changed quite significantly in recent years so obtaining professional advice is essential.
The Capital Gains Tax exemption is set to remain at £10,600 and, if unused, it cannot be carried forward or transferred between spouses. However assets can be transferred between spouses tax free, enabling married couples or civil partners to benefit from two annual exemptions.
The annual gift exemption for Inheritance Tax should not be overlooked either. Giving £3,000 each year to the next generation escapes Inheritance Tax on your death, without the need to survive the gift by seven years. This exemption can be carried forward for one year only so it’s something to consider before the end of the tax year.
A gift to charity will also be exempt for Inheritance Tax, without limitation, and a higher rate taxpayer will obtain income tax relief under the Gift Aid scheme. Again this can lessen your tax liability for the year.
The budget is just round the corner with further changes to the tax system being anticipated so seek advice and act today before it’s too late.
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