Year-end tax planning tips

There are less than two months to go before the end of the tax year on April 5, so if you want to make the most of your annual tax-free allowances, you’d better get your skates on.

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Sorting out your finances now is vital, especially as there are several important changes coming into effect at the start of the new tax year on April 6. Here, we explain the best ways to minimise your tax bills….

Make use of personal allowances

Every person in the UK is allowed to earn a certain amount of money each year without paying tax, known as a personal allowance. This tax year, we each have a personal allowance of £6,475, with higher allowances available to those aged 65 and above.

If you are married and one partner is not working, it makes sense to transfer savings accounts to them, so that you pay less tax as a couple. If you don’t make use of your personal allowance in any tax year, you cannot carry it forward to the next year.

Use your individual savings account (ISA) allowance

ISAs allow you to save money free of income tax and capital gains tax. This tax year, you are allowed to put £5,100 into a cash ISA, and the same amount into a stocks and shares ISA, or you can put the whole £10,200 allowance into stocks and shares.

From April, you will be able to invest £5,340 in a cash ISA, and £5,340 in a stocks and shares ISA. Alternatively, you can invest your whole £10,680 ISA allowance in stocks and shares. Any allowance not used by the April 5 deadline will be lost forever.

Several best buy cash ISAs have been launched in recent weeks. Nationwide Building Society, for example, has just launched an e-cash ISA offering a market-leading rate of 2.90%, although you do need to hold a card account with Nationwide to qualify.

Alternatively, if you don’t want to have to open two accounts, Santander’s Flexible ISA Issue 3 pays a highly competitive 2.85% and is again easy access, although it doesn’t accept transfers from other providers.

Top up your pension

For every £80 a basic-rate taxpayer put into their pension this tax year, the government will top it up by £20, so that the total contribution to your pension is £100. This is because you get basic rate tax relief on pensions at 20 %. Higher rate earners do even better because they can get up to 40 % tax relief, so £100 paid into a pension will only cost £60, and top rate taxpayers receive 50% on their contributions – that is £1 from the government for every £1 they save.

From April, however, the maximum amount that savers can put into pensions and claim tax relief on will be reduced from £255,000 to £50,000. That means if you want to make a big lump sum payment into your your pension you’d do well to do so before the end of this tax year.

Richard Mannion, national tax director at accountants Smith & Williamson, said: “From April 6, 2011, the new pension rules will be less attractive for those on incomes of less than £150,000 who can currently pay a pension contribution up to the level of their earnings and get full tax relief.

“So, someone with earnings of £100,000 this year could make a £60,000 pension contribution and it would cost them £36,000 after 40% tax relief. Under the new rules, the maximum contribution will be £50,000 and so individuals with incomes below £150,000 this year should consider paying large pension contributions before April 6 2011.”

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Inheritance tax planning

If you haven’t done anything about inheritance tax planning, you should do so now. Currently, inheritance tax (IHT) is charged at 40% on anything you leave over £325,000 when you die. Soaring house prices in recent years have pushed more and more people into the inheritance tax trap, so don’t assume only the super-rich are affected.

Most importantly, you should write a will, making it clear who you want to leave your money and possessions to when you die. You may then want to try and minimise any potential inheritance tax bill by giving regular small gifts away.

You can give away a lump sum of up to £3,000 in each tax year without paying inheritance tax – known as your ‘annual exemption’, or £6,000 this year if you haven’t used last year’s allowance.

You also have a ‘small gifts exemption’ which means you can make small gifts of £250 each year free of IHT, which is useful if you plan to give money at Christmas or on someone’s birthday. There is no restriction on the number of small gifts, but they must each be to separate individuals. You cannot use your annual exemption and your small gifts exemption together to give someone £3,250.

Reduce your capital gains tax liability

According to research by unbiased.co.uk, the professional advice website, UK taxpayers are expected to waste a shocking £552million in unnecessary capital gains tax (CGT) payments this year.

CGT is a tax charge that arises from the disposal of assets, such as shares or buy-to-let properties, charged at 18% for lower and 28% for higher-rate tax payers. Every individual has an annual capital gains tax free allowance, which stands at £10,100 for the current 2010/11 tax year.

The limit applies to each individual, so if you are married or in a civil partnership you each have an annual exemption and should ensure each of you maximise your CGT free gains.

There are plenty of ways to reduce CGT bills, for example, through the ‘bed and ISA' option - a common form of CGT planning where investors sell investments or assets, use their annual CGT exemption and then buy the assets back within a tax-efficient ISA in the new tax year, thereby ‘washing' out the capital gains.

Another option is ‘bed and spousing', whereby investors sell their investments or assets, then their spouse or civil partner buy them back, which means the gain materialises for the seller and any future gain is in the spouse's name and both of the couple are utilising their annual CGT exemptions.

Get advice

Tax planning can be complicated, so seek professional independent financial advice if you aren’t sure of how to proceed.

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