Key tax deadlines in January and April make this the ideal time to review tax savings. Here are LEBC’s Tax Saving Tips.
Payment and reporting deadline
File your tax return and pay any tax you owe for 18/19, by 31 January 2020. After then fines and penalties apply even if you owe no tax.
Interest paid on deposit accounts, gilts and corporate bonds is tax free for the first £1,000 for basic rate taxpayers, £500 for higher rate taxpayers. Top rate taxpayers, (income over £150,000), get no allowance. Interest above this allowance is taxable at the income tax rate applicable (See Table).
Tax is no longer deducted at source, so taxpayers with interest above these allowances will need to pay any tax due via self -assessment, unless their tax code has already been adjusted to account for this.
Couples with differing tax rates could place taxable interest-bearing investments in the ownership of the lower taxpayer. Those with other income of less than £17,500 can earn up to £20,500 of interest and dividends tax free. A top rate taxpayer pays 45% on all interest received.
For income from shares, £2,000 of dividends are tax free. Tax due on the excess earned in 2018/19 must be paid by 31 January via self-assessment. Tax due will depend upon the other income arising in that year. Shares may be placed in an Individual Savings Account (ISA) so that no future income or gains will be taxable. However, transferring shares to the ISA may give rise to a capital gains tax liability if the gain, after losses, exceeds the available portion of the £12,000 annual allowance.
Capital Gains Tax
The tax -free allowance of £12,000 must be used by 5 April or is lost. Realising gains and losses each year can reduce the total tax payable. Claimed losses can be carried forward. Spouses/civil partners may change ownership of assets between them, prior to selling, CGT free and in this way double up the tax -free allowance. Capital gains are taxed at 10% for non and basic rate taxpayers, 20% for higher rate and top rate taxpayers. Residential property sales, which are not a main residence, are taxed at 18% and 28% respectively.
Tax Exempt Savings
Savings in an Individual Savings Account (ISA) incur no income tax or capital gains tax. Adults can add up to £20,000 each per tax year, which ends on 5 April. Under 18s can save £4,368 in a Junior ISA this tax year. 16-17-year olds may invest £24,368 if they open a cash ISA alongside their Junior ISA 18 to 40-year olds, who wish to buy their first property, may invest £4,000 of their ISA allowance in a Lifetime ISA. Savings attract a Government bonus of 25%, so long as the money is used to buy their first home or, if not, invested till age 60. Penalties apply if accessed for any other purpose.
If you are willing to invest for the longer term with a high risk of losses, investing in a Venture Capital Trust (VCT) or Enterprise Investment Scheme may be tax efficient. Income tax relief at 30% is granted on the investment, which can also be used to shelter capital gains and VCTs pay any dividends tax free.
Married couples/civil partners, where one is a nil rate taxpayer and the other is a basic rate taxpayer (see table) may elect to transfer 10% of the personal allowance from the nil rate to the basic rate taxpayer. For 2019/20 and beyond this saves £250. A claim for all 4 years made before could be worth £900. For more on this see Are You Eligible for a Tax Windfall?
Gifts made to charities under the gift aid scheme offer tax relief for higher and top rate taxpayers. Gifts made reduce taxable income so that a 40% taxpayer saves an additional 20% and a top rate taxpayer 25%. Charitable giving reduces income for the purpose of assessing eligibility for the personal allowance (income over £100,000) and for tax free child benefit (income over £50,099). Claims for one off payments and regular donations, not included in the tax code, need to be made by self-assessment.
Saving for retirement can reduce your tax bill. Tax relief is given at the top rate of tax you pay. See How Does Pension Saving Tax Relief Work?
Taxable Income Thresholds UK, excluding Scotland.
|Taxable Income||2018/19 (£)||2019/20 (£)|
|Starting rate 0%||5,000*||5,000*|
|Basic rate 20%||11851 - 46,350**||12,501 - 50,000|
|Higher rate 40%||46,351-149,999***||50,001-149,999|
|Top rate (45%)||150,000 plus||150,000 plus|
*Where earned income does not exceed this allowance up to £5,000 of savings income is taxed at the starting rate of 0%. (not Scotland )
** Residents of Scotland up to £43,430 at 19%, 20% and 21%
*** Residents of Scotland £43,430 to £149,999 at 41% and 46%over £150,000. See blog Scots taxpayers face triple whammy.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. A pension is a long-term investment. The fund value may fluctuate and can go down. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. If you are unsure of the suitability of any investment or product for your circumstances, please contact an adviser. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views
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