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Tax Planning

Overview

Both individuals and companies are entitled to fully utilise a variety of allowances. The purpose of the following information is to highlight some of the more common allowances and some of the potential opportunities

All figures quoted are based on the 2008 / 2009 Tax Year

Individuals

The main taxes are: Income Tax, Capital Gains Tax and Inheritance Tax

Income Tax

The ‘standard’ personal allowance is currently £5,435 per annum; anybody with income (both earned income and income from savings) up to this amount is exempt from income tax. Children under the age of 18 are also entitled to the standard allowance.  There are additional allowances such as age allowance; after any other allowances / deductions, income between £5,435 and £36,000 tax is subject to tax at 20%. Any taxable income in excess of £36,001 is subject to a tax rate of 40%.

There is a “savings” tax rate of 10%; however, this only applies if your total income is no more than £2,320; if your savings exceed this limit you or you have other income (and your total of both the savings and non-savings exceeds £2,320 you pay the standard 20% income tax rate.

Dividends are subject to a more complex tax calculation; if your total income exceeds £36,001, there is an additional tax charge (technically, it is a tax rate of 32.5%). In practice, it works out at 25% of the net dividends received.  If when the dividends are added to other taxable income, your total taxable income is no more than £36,000 there is no more tax to pay (a 10% tax credit comes with the net dividends, which satisfies the tax liability if your total taxable income is not over £36,000).

Thought on saving tax ?

(a) Let us assume that an individual has some liability to 40% income tax; if this individual has any savings it might be advisable to consider tax-free or taxed-privileged investments. Perhaps an Individual Savings Account (ISA) or National Savings products would be most suitable.

(b) Where one spouse is subject to tax at 40% tax and one at 20% (or is not subject to income tax at all) it could be advisable to transfer some / all savings to the spouse who is subject to a lower rate of income tax.

The above are just two simple ideas to consider; there are a lot more tax planning opportunities

Age Allowance

Once someone reaches age 65 his or her personal allowance increases to £9,030, over age 75, it increases to £9,180. However, where an individual's total taxable income exceeds £21,800 the age allowance will reduce by £1 for every £2 of income over £21,800. Irrespective of the individual’s total taxable income, the personal allowance will not fall below the standard personal allowance. If someone age 65 had a total income of more than £28,990, he / she would lose all of their age allowance; this is known as the age-allowance ‘trap’.

How to retain your age allowance ?

It might be appropriate to consider investments that are deemed not to generate ‘taxable’ income. Examples would include Individual Savings Accounts (ISA's) and Investment Bonds. Such investments could help retain some or all of your age allowance

Capital Gains Tax (CGT)

The personal allowance is £9,600 each tax year.  However, it is not a cumulative allowance so if someone makes a gain of more than £9,600 in one year, the previous ‘unused’ allowance cannot be brought forward.  The amount of any capital gains can be offset by any allowable capital losses arising in that tax year, or unused allowable losses brought forward from previous tax years (losses can be carried forward indefinitely).

Transfers of assets between a husband & wife (and registered civil partners), living together, are treated as, neither a gain nor a loss to the spouse transferring it.  When the asset is sold, at a later date, by the recipient spouse, the asset is treated as though it had always been owned by the recipient spouse. The key benefit of transfers is to reduce CGT by using the recipient spouse’s annual exemption and potential lower marginal rate of tax.

Under the current CGT regime a death, is not classed as a disposal for CGT purposes.  In consequence, any capital gain between date of acquisition and date of death will ‘die’ with the asset owner and are effectively written-off. The asset value forms part of the deceased’s estate, the estate is deemed to acquire the asset at the current market value at the date of death.

Inheritance Tax (IHT)

This is a complex Tax; essentially IHT is levied on an individual’s estate (on death) if his / her estate exceeds £312,000, this is known as the ‘nil rate band’.  The value of the estate above £312,000 is subject to a flat rate of tax at 40%. There are a number of allowances, which can help reduce the chargeable estate value.

From October 2007, married couples and registered civil partners can make full use of both nil rate bands; this means that when the surviving spouse / partner dies it is possible to transfer up to £624,000 without IHT.  This is a complex matter and will require expert advice.

It is possible to gift £3,000 each tax year, so a married couple / registered civil partnership can gift £6,000 each tax year; such gifts are treated as allowable deductions from the value of a person’s estate.  One previous year’s allowance can be carried forward as long as the current year’s allowance is also used at the same time.  Further amounts can also be gifted if it can be shown that such gifts are out of income and do not deprive an individual from their ‘usual’ standard of living.  This is a simplified explanation; there is more detail to consider.  There are further amounts than be gifted.  If you want further information please ask us.

Transfers of value (gifts) of any size can be made; however, the excess above any allowances will still be deemed part of a person’s estate for 7 years from the date of the gift.  This is a complex area and advice should be sought.

The use of trusts has been in practice for hundred’s of years.  Despite successive legislation to “crack-down-on” so called “spurious” trust schemes, there are still many effective trusts. They can be an effective tool to help reduce IHT liabilities. This is a very complex area of IHT and advice should be sought.

National Insurance (NI)

This is a separate ‘tax’ in addition to Income Tax. The self-employed pay different rates of NI on similar bands of income as above to employees. 

Here’s an idea - Salary Exchange (for the employed)

It is possible to reduce NI payments by way of a Salary Exchange (often referred to as a salary sacrifice) arrangement. This is a method used to increase pension contributions. Salary Exchange does not mean you take home less pay; indeed you will be in exactly the same position with regard to your ‘take-home’ pay on the basis you pay a personal pension contribution. This is a very effective strategy for anyone who earns enough to pay NI.  It requires the co-operation of your employer; there may be some ‘pitfalls’ to be aware of; however, if they are covered-off it remains a highly effective strategy.

Limited companies

The main tax is Corporation Tax; it is charged on profits.  The small companies’ rate is 21% and the main rate is 28%; there is also a marginal rate of 29.75%; it falls in between the smaller companies’ rate and the main rate.  This is too complex a subject to deal with herein, if you run your own business you should seek advice about ways to reduce your tax liability.

Sovereign Asset Management is a trading style of Sovereign Asset Management (Bristol) Limited, which is authorised & regulated by the Financial Services Authority (number 502036). The Limited Company is registered in England & Wales (number 5983932); the registered address is 3 Saltwell Avenue, Whitchurch, Bristol, BS14 0PE. Any guidance contained within this website is subject to the UK regulatory regime; as such the content is for consumers only based in the UK. The FSA does not regulate all forms of Protection, Business Assurance or Tax Planning. Where this website offers links to any other websites, Sovereign Asset Management (Bristol) Limited have no control over the content and cannot be held responsible for the content or any material transmitted to your computer.