How tax-efficient are your finances?
Give yourself a makeover before the end of tax year
If current finances permit, contributing more towards your pension before the end of the current tax year on 5 April 2009 will enable you to benefit from tax relief and from the tax-efficient treatment of pension funds. The total annual allowance for this tax year that you can utilise and receive tax relief upon is up to 100 per cent of your relevant earnings, capped at £235,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions.
There is a limit on the value of retirement benefits that you can draw from an approved pension scheme before tax penalties apply. That limit is called the Lifetime Allowance. The Lifetime Allowance is £1.65m in the 2008/09 tax year. At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The amount will depend on how the excess is paid.
You may also be able to top up your tax-efficient pension contributions to a company pension scheme, or make Additional Voluntary Contributions (AVCs). AVCs could offer a cost-effective way to increase your pension fund if you have a company pension scheme. Following the changes that became effective from 6 April 2006, there are now even more ways to pay extra funds into your pension.
If you are a higher rate taxpayer, you may wish to consider saving tax by transferring money into a lower earning, or non-earning spouse’s or civil partner’s name. If appropriate to your situation, maximising personal tax allowances through non-taxpayers will enable them to claim tax back on bank and building society savings accounts, so that the tax liability on the savings is lower, or none.
Fully utilising your annual Individual Savings Account (ISA) allowance, currently £7,200 (2008/09), will enable you to avoid tax by sheltering investments. It may be appropriate to consider moving savings from an ordinary deposit or savings account into an ISA. Friendly Society savings accounts or products from National Savings & Investments also offer tax-efficient savings options.
If you are single and have assets over £312,000 (2008/09), or are married or in a civil partnership with assets over £624,000 (2008/09), make sure that you don’t leave an inheritance tax (IHT) bill charged at 40 per cent on the assets of your estate over these allowances behind for your heirs to pay on your premature death.
Write your life assurance policies in an appropriate trust, utilise your IHT allowances and make a Will. If you have made an outright lifetime gift, the actual IHT rates and allowances could be affected, therefore it is important to receive appropriate advice before taking action.
It’s important to check that you are paying the correct amount of tax. Check your tax code to make sure you haven’t been issued with an incorrect tax code and reclaim any amounts that may be wrong. Also make sure you’re getting your correct personal allowance.
If you are a taxpayer and raising extra income by renting a room under ‘rent-a-room relief’, the rent is exempt from income tax on profits from furnished accommodation in your only or main home if the gross receipts received are £4,250 or less. Receipts over the £4,250 exemption limit are taxed on an alternative basis that may produce a lower tax bill.
Make sure, if applicable to your situation, that you take full advantage of your annual capital gains tax (CGT) exemption limit. For the 2008/09 tax year CGT is charged at a flat rate of 18 per cent on chargeable gains over £9,600. Taper relief and indexation allowance are no longer applied. Financial products are available that could help you to minimise or defer a capital gains tax liability.
If you do have a CGT liability, you may also wish to consider using your allowance more efficiently by transferring assets between you and your spouse or civil partner to make the most of both of your CGT allowances.
Giving to charitable good causes utilises tax-efficient means of charitable giving, including using a deed of covenant, Gift Aid or payroll giving.
If your child or grandchild was born on or after 1 September 2002, they are eligible for a child trust fund (CTF). This is a long-term savings and investment account where the child (and no one else) can withdraw the money when they turn 18. Neither you nor the child will pay tax on income and gains in the account. A £250 voucher is given by the government to start each child’s account and then a further contribution of £250 to all eligible children at the age of seven.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
