Let’s Talk About Tax...

The countdown is on; changes to tax thresholds for 2017/2018 are scheduled for April 2017. New tax rates mean a new set of allowances, but don’t panic there’s still time to utilise your existing ones. In fact the start of 2017 is the perfect time for a financial overhaul, but we urge to act now to avoid missing out.

When it comes to year end tax planning, you don’t want to waste precious opportunities. So we’ve highlighted six financial moves you and your Bellpenny Financial Planner could consider before the clock strikes midnight.

1. Reducing your Income Tax Rate

As a result of the loss of personal allowances, any income is subject to the following rates of income tax;

If you’ve been impacted you may want look at options on how to reduce your taxable income below £100,000 or £150,000. But the question is, how?

Income Rate of Tax
In excess of £150,000 45%
£100,000 - £122,000 65%

The good news is that there are some options available. Changing income into non-taxable forms, deferring your income, making pension contributions, donating to charity or transferring income producing assets to a spouse or civil partner who has lower income are all ideas which are certainly worth discussing with your Bellpenny Financial Planner.

The introduction of the dividend allowance, where £5,000 of dividend income is tax-free for all tax payers, and £1,000 (£500 for higher rate tax payers) of savings income is tax-free for basic rate tax payers, couples may want to think about equalising their investments to ensure these allowances are utilised to their maximum potential.

2. Reviewing any dividend income

Despite the introduction of a dividend allowance, the rate of tax on dividend income has risen since the 6th April 2016 and the notional 10% tax credit has now been abolished. Ensuring you utilise your allowance is important, but equally it may be the case that you need to consider sheltering the dividend tax where allowances are fully utilised. This all comes down to investment choice.

The table below outlines the effective rates of tax on dividend income in comparison to rates in 2015/2016 and the rates for 2017/2018.

Individuals 2015/16 2016/17 2017/18
Dividend Allowance N/A £5,000 £5,000
Basic Rate Tax Payers 0% 7.5% 7.5%
Higher Rate Tax Payer 25% 32.5% 32.5%
Additional Rate Tax Payer 30.65% 38.1% 38.1%

For Company owners, dividends taken in 2016/2017 will suffer an extra 6% tax compared to dividends paid in 2015/2016; with the effective rate reducing slightly in 2017/2018 as a result of the reduction in Corporation Tax, there will be a small benefit in deferring dividends until next year.

Company Owners 2015/16 2016/17 2017/18
Dividend Allowance N/A £5,000 £5,000
Basic Rate Tax Payers 20% 26% 25.08%
Higher Rate Tax Payer 40% 46% 45.33%
Additional Rate Tax Payers 44.44% 50.48% 49.86%

3. Converting to Gains

If you have substantial investments outside of an ISA or other tax efficient wrapper, you could rearrange your investments so that they produce either a tax-free return or a return of capital, which is taxed at a maximum rate of 20% (excluding residential property).

4. Contributing to a pension and utilising your carry forward

• The standard annual allowance is currently £40,000 for pension contributions but is reduced for those with adjusted income in excess of £150,000;

• The minimum annual allowance is £10,000 for individuals with income of over £210,000;

However tax relief may still be available at your highest rate of tax on contributions paid.

The good news is that unused annual allowances from 2013/2014, 2014/2015 and 2015/2016 can be brought forward and used in 2016/2017. However, if allowances from 2013/2014 are not used by the end of the tax year, the allowance available will unfortunately be lost.

5. Retaining your Child Benefit

If your income exceeds £50,000 in this current tax year, you will start to lose your child benefit. Those that earn between £50,000 and £60,000 have an effective rate of tax of 70%. By making a pension contribution before the end of the tax year it may be possible to retain your child benefit and at the same time achieve an effective tax saving of 70% of the gross contribution paid.

6. Utilising your Annual Exemptions and topping up your ISA

Everyone (including minors) can realise capital gains of up to £11,100 tax-free in 2016/2017 but the unused exemption in a year cannot be carried forward. One way in which you can make use of your annual exemption is to fund your ISA from your General Investment Account (GIA). This year you can pay in up to £15,240 and this will increase to £20,000 from April 2017.

Married couples and civil partners can transfer assets between them without tax consequence and this should be considered to ensure both annual exemptions are fully utilised but any transfer needs to be without restriction.

Your Bellpenny Financial Planner can take a review of your investments to ensure you are making the most of your allowances. Seeking professional advice will assist you to be clear on the rules and restrictions which apply to your circumstances. If you weren’t aware Bellpenny also offer a specialist tax and trust planning service.