With just days before the end of the tax year on April 5, Paul Fisher, chartered financial planner with Barclays in Bristol, looks at effective planning for the 2011/12 tax year.
Using your personal allowances
Married couples and civil partners can transfer income-producing assets outright to their spouse to make maximum use of their personal tax allowance and at a lower rate of income tax.
Taking advantage of tax-free investment
Anyone over the age of 18 (or 16 for cash-only ISA) can invest up to £10,680 in the current tax year in an Individual Savings Accounts (ISA). As you cannot carry forward your ISA allowance from one tax year to the next you should consider investing your full allowance if you have not already done so. Following the launch of Junior ISA in November 2011, children under the age of 18 can also save up to £3,600 per annum.
Capital Gains Tax Planning
Selling a proportion of your investments in order to make use of the capital gains tax annual exemption allowance (£10,600 for 2011/12) available to every individual.
For those who have already fully utilised their annual exemptions, consideration should be given to transferring assets with built-in gains to your spouse or civil partner, if they have unused capital losses and/or to use their annual exemption.
Maximise your Pension Contributions
With the annual limit on tax relief for pension contributions having already been reduced from £255,000 to £50,000, it is understood that the Government may consider reducing this further going forward.
Under current legislation, if you have earned income, you can contribute 100% of your earnings or £50,000, whichever is lower, into your pension and obtain tax relief on this amount. With income tax rates of up to 50%, the net cost of this contribution could be as low as £25,000.
You are also able to carry forward any unused allowance from the previous three tax years to maximise the level of contribution (and hence maximise the income tax relief) enabling you to pay up to £200,000 into your pension this year although you will need to have received the earnings to justify such a payment.
As a slight aside I must mention that the pension lifetime allowance is reducing on April 6 from its current rate of £1.8m to £1.5m. For those with sizeable pension pots already in excess or likely to grow above the reduced annual allowance, now is the last chance to apply for Fixed Protection which would allow you to protect your Lifetime allowance at £1.8m before the deadline of April 5.
Anyone considering a review of their retirement planning strategy and pension funding in the 2011/12 tax year should seek advice without delay.
Make tax efficient investments.
You can invest in a qualifying Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT).
Investments can obtain 30% income tax relief (providing it is held for three years) on an investment into a qualifying Enterprise Investment Scheme investment up to £500,000 in 2011/12, (i.e. tax relief of up to £150,000 in the tax year of investment), as well as no capital gains tax on disposal.
Relief is available at 30% on a Venture Capital Trust investments up to £200,000 (i.e. a tax relief of £60,000) provided it is held for five years, dividends are tax free and the investment can be cashed in free of capital gains tax.
To receive the tax relief you must have paid an equivalent amount of tax in that tax year and as well as the tax advantages, it should be remembered Enterprise Investment Schemes and Venture Capital Trusts are higher risk investments. You can lose some or all of the investment that you make.
To sum up
As the tax year end fast approaches and the window of opportunity closes, taking some time to implement these often simple yet extremely effective planning ideas will help build tax efficiency into your financial affairs. To ensure maximum effect you should use the above in conjunction with a long term planning strategy to produce tangible benefits in the months and years ahead.
Please note these concepts should always be fully discussed with a financial adviser, tax and/or legal adviser prior to implementation as they are not suitable for all circumstances.
