Income tax planning
The marginal UK income tax rate remains unchanged at 45% for taxable income over £150,000, and 38.1% for dividends over this threshold. Scottish taxpayers still are subject to different rates, with a 46% rate for income (including dividends) over £150,000.
The personal allowance, which exempts the first £12,500 of income, is progressively withdrawn for certain individuals with income over £100,000. For 2019/20, the allowance is nil when income exceeds £125,000, and a marginal rate of 60% applies to income falling between £100,000 and £125,000.
The £1,000 personal savings allowance still remains, but is phased down to £500 for higher rate taxpayers and fully phased out for additional rate taxpayers. The £2,000 allowance for dividends still remains and is not phased out.
Accelerating or deferring income
Individuals who have control over the timing of the receipt of income may consider either accelerating or deferring the receipt. Acceleration may be appropriate if the individual is expecting to be subject to a lower marginal rate in 2019/20 than 2020/21. Deferral may otherwise be appropriate in other cases, in order to defer the payment of taxes. It is important, of course, to check that the deferral is actually effective for tax purposes.
Cash gifts to UK charities (and certain European charities) are eligible for tax relief under the “gift aid” scheme. Under the mechanics of the relief, 20% of the gross gift is paid by HMRC to the charity. To give an example, for a 40% taxpayer making an £800 donation to a charity, the gross value of the gift is £1,000 since the charity can claim back £200 from HMRC. The individual may claim 20% tax relief on their tax return on the gross value, reducing the net cost to £600. He or she must have paid sufficient UK tax for the year in order to cover the 20% paid over by HMRC.
The gift can even be made after the end of the tax year and “carried back”, provided that it is made before 31 January, and before the date the original tax return is filed. This is particularly valuable to wealthy individuals who have substantial surplus funds and philanthropic goals. Individuals wishing to maximise their tax relief should wait until after the end of the tax year when their tax liability is known and the precise maximum gift can be calculated.
Gifts of land and shares can also be made to charities under a different set of rules. Any gain triggered by the gift is exempt from capital gains tax and the gift itself should not be subject to inheritance tax (IHT). Asset donations can therefore be particularly attractive.
Registered pensions remain very tax efficient. The combination of relief on contributions, tax free growth in the pension fund itself, as well as the ability to take a tax-free lump sum on retirement make these vehicles very attractive. To the extent pension benefits are not drawn, they are generally exempt from IHT.
Up to £40,000 of contributions to a registered pension scheme can generally be claimed as a tax deduction (the “annual allowance”). The allowance is capped at the level of the individual’s earnings, if lower than £40,000. Where the individual’s income exceeds £150,000, the relief is reduced by £1 for every £2 over £150,000, resulting in a maximum deduction of £10,000 if income is greater than £210,000. Individuals who have already started to access their pension savings may have a reduced annual allowance of £4,000.
Pension contributions are particularly valuable for those earning between £100,000 and £125,000 since they are subject to a 60% tax rate on that income, as explained above.
Individuals should consider making additional contributions to their pension schemes before 5 April 2020, in order to obtain relief at up to 40% or 45%.
The £40,000 annual allowance may be carried forward up to three years. As such, individuals should review the availability of any unused allowance for 2016/17 since this will expire on 5 April 2020.
The total value of an individual’s pension pot should not exceed the “lifetime allowance of £1.055m for 2019/20. Exceeding this can result in unwanted future tax charges.
Married couples and civil partners may wish to contemplate a transfer of income producing assets between themselves, in order to ensure that the income is taxed at the lowest possible rate where one spouse has a lower marginal rate. Various anti-avoidance provisions need to be considered when doing this.
For couples with children, it is possible to transfer income between one another in order to keep both spouse’s income below the £50,000 threshold of the High Income Child Benefit charge.
The threshold set by the government for taxpayers paying Class 1 or Class 4 NICs has risen to £9,500, effective from 6 April 2020.