End of Tax Year 2014/15 personal tax planning

1) Income Tax – Reducing the tax exposure

With the end of the tax year fast approaching, now is the time to consider planning opportunities to mitigate tax. This is the first in a series of two articles on personal tax planning; summarising some of the areas in which tax exposure can be reduced. 

Tax is currently charged at 40% on taxable income between £31,865 and £150k, and 45% on income over £150k. However, the effective rate of tax between £100k and £120k is higher due to the tax free personal allowance being reduced by £1 for every £2 of net income over £100k. It is vital for those individuals with income approaching or above the £100k threshold to have good tax planning which may involve reducing their income below the limits. Ways in which the taxable income could be reduced include: giving income generation assets to a spouse with lower earnings; deferring income into the next tax year (this will not be beneficial if you are expecting to continue to be paid more than £100k); making pension contributions; or making payments to charities via Gift Aid.

Employers do sometimes offer arrangements allowing employees to sacrifice salary and therefore lower their tax liability, replacing their income with alternative tax-free benefits. Schemes such as tax free employer pension contributions, workplace nursery, cycle to work scheme or tax fee mobile phones can all be included in this.

Capital Gains Tax (CGT), charged at 18% or 28% depending on your income band, should also be considered. If you have significant investments, restructuring them to produce capital gains rather than income would be advisable as the top rate of income tax is 40 or 45%. For more details on CGT, please take a look at the second article in the series here.

Furthermore, each year, the taxable benefit on company cars increases and it can make sense to switch your company car to a more tax efficient banding. As an alternative, a personal car can be used for business travel, meaning a tax free mileage allowance can be claimed from the employer. 

In January 2014, the high income child benefit charge came into effect – applicable once an individual’s income reaches over £50k. It is forced back on a sliding scale for income between £50k and £60k, above which all the benefit is lost and unless you have requested to stop receiving the benefit, then repayment is due through your personal tax return or PAYE coding. It is therefore ideal if both partners are able to keep their income below £50,000 so the child benefit will not be taken away.

If you have any questions on income tax planning, please contact Shakeel Butt.