14 Mar 2018
Tax doesn’t have to be taxing
As you approach a new tax year, we take a look at a few of the planning areas that you may wish to consider.
Individual Savings Account (ISA)
Have you maximised your ISA allowance for this tax year? The maximum amount you can save tax-free in an ISA for the 2017/18 tax year is £20,000 per person and will remain at £20,000 in the new tax year. Your allowance can be invested into a Cash ISA, a Stocks & Shares ISA or a combination of the two.
The ISA is a tax-free wrapper in which your investments are held and any ISA allowance not used is lost.
After the introduction of the new Lifetime ISA (LISA) on 6 April 2017, the Autumn Budget announced little change to ISAs for the new tax year.
Did you know that you have the following ISA options available?
- Cash ISAs and Stocks & Shares ISAs allow anyone over the age of 16 to have an ISA invested in cash and anyone over the age of 18 to have an ISA invested in any combination of cash and shares, up to the ISA allowance of £20,000 per annum.
- The Lifetime ISA (LISA) is available for people aged between 18 and 40 to save towards buying a first home, or alternatively can be withdrawn after the age of 60. The government will add a 25% bonus to personal contributions of up to £4,000, which will receive an additional bonus of £1,000, making a total of £5,000. The £4,000 contribution is the maximum annual subscription and will form part of the overall £20,000 allowance, rather than being in addition. Any withdrawals from the LISA that aren’t put towards purchasing your first home are withdrawn before the age of 60 will incur a withdrawal penalty of 25%. This withdrawal penalty has been put in place to ensure the dual purpose of the LISA (money put towards your first home or funding retirement) is met.
- The Junior ISA is available to UK residents aged 18 and under who do not have a child trust fund account.
Below is a summary of the maximum annual ISA allowances:
|Annual ISA allowances||2017/18||2018/19||2019/20||2020/21||2021/22||2022/23|
|Cash and stocks & Shares combined||£20,000||£20,000||£20,000||£20,000||£20,000||£20,000|
The Autumn Budget which was presented to Parliament on 22 November 2017 saw pension legislation largely untouched. After a number of changes to pensions over recent years, including Pension Freedoms and reductions in allowances, the budget was a welcome relief to pension savers.
The Chancellor confirmed that the Lifetime Allowance (LTA) will increase in line with the Consumer Price Index (CPI) by £30,000 from £1 million to £1.03 million from 6 April 2018 and will continue to rise in line with CPI in future years.
The Annual Allowance (the maximum contribution to your pension each year that will receive tax relief) is currently £40,000 per annum and remained untouched in the Autumn Budget. The Annual Allowance applies across all of the pension schemes you belong to and the limit includes all of the contributions that you or your employer pay or that anyone else pays on your behalf. It is possible to carry forward any unused Annual Allowance from the previous three tax years.
In addition to the Annual Allowance there is a further restriction called The Money Purchase Annual Allowance (MPAA) which was introduced on 6 April 2015. The MPAA was designed to discourage individuals who seek to abuse the new flexible pension rules, by introducing a lower annual allowance. This applies to anyone who has accessed their pension flexibly, through Uncrystallised Funds Pension Lump Sum (UFPLS) or flexi-access drawdown, and wants to continue paying contributions into a defined contribution pension scheme. The MPAA was reduced from £10,000 to £4,000 per annum, effective from 6 April 2017.
Changes to the Dividend Allowance
A new dividend tax regime was introduced on 6 April 2016, replacing the dividend tax credit with a new tax-free dividend allowance. The new allowance meant that you wouldn’t pay tax on the first £5,000 of your dividend income.
The Autumn Budget confirmed a reduction to the tax-free allowance for dividend income from £5,000 to £2,000, with effect from 6 April 2018. This further limits those who receive earnings as dividends, or receive dividends income from investments.
The Chancellor has pointed out the discrepancies between the higher taxation of employees under PAYE and the self-employed and a reduction in the allowance should reduce the differential.
Inheritance Tax (IHT)
Almost one year on from the introduction of the new Residential Nil Rate Band (RNRB) and the verdict is in!
This valuable IHT saving for those who qualify will increase from £100,000 to £125,000 per person on 6 April 2018. The RNRB will continue to increase by £25,000 a year to £175,000 by 6 April 2020.
The additional allowance is on top of the £325,000 IHT nil rate band, which means a married couple could potentially be able to pass up to £1m of assets, without paying IHT.
Capital Gains Tax
Is tax due on profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value? For the new tax year, your annual tax-free allowance or Annual Exempt Amount will be increased to £11,700, which means you can make gains up to this amount without paying tax. Losses made can also be offset against gains, but the allowance itself cannot be carried forward if unused. Remember that you can transfer assets between your spouse or civil partner to make use of £23,400 of allowances. Anything over this amount is taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers.
Venture Capital Trusts
Ways to benefit from income tax reclaim are becoming increasingly limited, due to restrictions on pensions at both an annual and lifetime level. Therefore, Venture Capital Trusts (VCTs) are useful tools if you have high earnings. They offer the opportunity to receive 30% of the amount of investment back from HMRC, as well as the chance to pay tax-free dividends. Any VCT holdings must be held for at least five years. They typically invest in small UK companies, although many have exposure (up to 30% of the underlying VCT) to non-qualifying investments, which allows income to be paid from day one. Gains are tax-free.
Enterprise Investment Schemes
Another useful way to receive 30% income tax back is through Enterprise Investment Schemes, again involving investing in small UK companies. They are also able to allow you to defer any capital gains realised in the last 36 months or in advance of any in the next 12 months. After holding them for two years, the inheritance tax treatment means your estate pays 0% rather than 40%. Any loss within the Enterprise Investment Scheme can be offset against income tax of the same year or the preceding tax year. It can also be offset against capital gains of the same year or carried forward to be offset against future gains, subject to the normal treatment. They must be held for a minimum of three years but tend to be held for around four to five years. Any gains are tax-free.
Both Venture Capital Trusts and Enterprise Investment Schemes offer investment strategies that may be useful for certain individuals who are happy to accept the higher risk nature of the investments and for those whose pension contributions may be restricted in the future.
The table below gives you a summary of the tax positions for these investments:
|ISA||Pension||Enterprise Investment Scheme||Venture Capital Trust|
|Income tax reclaim||0%||20%/40%/45% depending on tax you pay||30% and carry back from previous tax year||30%|
|Investment Limits per Tax Year||£20,000||£4,000/£10,000/£40,000||£1 million; potentially a further £1 million into knowledge-intensive businesses||£200,000|
|Capital Gains Tax Deferral||No||No||Yes||No|
|Tax-Free Income||Yes||25% of the pot can be taken tax-free||No||Yes|
|Tax-Free Gains||Yes||Within pension wrapper||Yes||Yes|
|Minimum Investment Period||None||Accessible from age 55||3 years||5 years|
All statements within this article concerning tax treatment are based upon our understanding of current tax lawand HMRC practice and can be subject to change.This article is not intended to constitute personal advice and no action should be taken, or not taken, on accountof the information provided.