With the 2013-14 tax year less than a month away and the budget just around the corner there are a few things you can still do to shelter your income and savings from tax charges. Here are just some of the tax saving tips we’re discussing with higher earners right now.
- Pensions – keep an eye on your lifetime allowance
You’d expect me to suggest that you look to maximize the tax advantages of pension savings by investing into your personal pension. That’s true for those who are well under the pension Lifetime Allowance (the total amount of UK pension savings each individual is allowed to build up in their lifetime). However, as the Lifetime Allowance reduces from £1.5M to £1.25M on 6 April 2014 you need to exercise caution if you are close to the limit. You can claim “fixed protection” of your Lifetime Allowance at the £1.5M level prior to 6 April 2014. If you do so you will not be able to make any further UK pension savings after 5 April 2014. If you do not opt for “fixed protection” by 5 April 2014 and your pension savings, including investment growth, exceed £1.25M, then you will incur tax charges on your pension when it is paid out. If you have pension savings on 5 April 2014 which have a value of more than £1.25 million, you can claim “individual protection” which will allow you to protect those savings (up to a value of £1.5 million), as long as you don’t have primary protection (a claim that could have been made in previous years). As I hope I’ve illustrated pensions lifetime allowance is a complex area and you should take advice from a Chartered Financial Planner if you are in any doubt how this might affect you.
- Make the most of tax efficient savings vehicles
Make the most of tax breaks available by investing in the likes of ISAs, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT). If you’ve not already done so you can invest up to £11,520 in ISA’s in the 2013-14 tax year.
- Time your income
With taxable income of between £100,000 and £118,880 taxed at an effective rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £118,810 (between £100,000 and £120,000 from 6 April 2014 if no further changes to this rule are made in the Budget) there could be a significant advantage to deferring the date at which you take income. This may not be possible if you are employed, but could be possible if you are a company director or owner.
- Use all your allowances
Consider the various allowances you are your spouse may be able to utilize, especially if you are both employed in your business. If one spouse has a much lower level of income than the other then consider transferring income and income producing assets to the lower earner to take advantage of all the reliefs available. If you haven’t already done so can you use your Capital Gains Tax personal exemption (£10,900 for the 2013-14 tax year). You and your spouse are both entitled to this exemption each year so gifts between spouses prior to the sales of shares or property etc may be tax-effective.
Our advice is to try and structure your tax affairs so that these last minute measures aren’t necessary. But we are pragmatic and we know many of us leave things very much to the last minute. By following these few tips alone you could make significant tax savings in the 2013-14 tax year, better still if you use these ideas to kick start a more thorough approach to tax planning in 2014-15.
Andy Parker
Chartered Financial Planner, Solihull