5 March 09

As we move towards the end of the current 2008/09 tax year it is worth pausing to reflect on how you can maximise your disposable income, take full advantage of tax free products available to you and minimise your taxation liabilities. We all have numerous annual reliefs and allowances available to us, and listed below are a few points that you may wish to consider to help reduce the amount of tax that you pay to HM Revenue & Customs.

Maximise Your Tax Free Savings

• Funds invested within an Individual Savings Account (ISA) are free from income tax and capital gains tax. The ISA limit was increased on 6 April 2008 so that you can now invest up to £7,200 per annum in stocks and shares (previously £7,000). The limit on what you can invest as cash within an ISA has been increased to £3,600 from £3,000.
• Pension funds provide a tax efficient method of saving for your retirement. All UK taxpayers can invest an amount equal to their Net Relevant Earnings (basically your salary or self employed profits) in a tax year and get tax relief on the payment that you make. Even if you have no Net Relevant Earnings you are allowed to invest up to £3,600 gross per year into a pension fund. This could be a useful way to set aside a nest egg on behalf of your children or grandchildren, because for every £80 that you pay the government will add a further £20. The money will then grow totally free of tax. Additionally, higher rate taxpayers will be due a further 20% of tax relief on pension payments that they make into their own personal pensions.
• For those looking to make more substantial pension contributions the annual limit on payments this year has been increased to £235,000 per person, and the lifetime contributions limit has been increased to £1,650,000.
• The annual limit for investments into an Enterprise Investment Scheme (EIS) company has been increased from £400,000 to £500,000. In appropriate circumstances up to 38% tax relief will be available on investments into these companies (20% income tax relief, and 18% capital gains tax relief). An added benefit of investing in an EIS company is that if you sell the shares in the future and make a capital gain then as long as various qualifying conditions are met the gains will not suffer a charge to capital gains tax.
• A Venture Capital Trust (VCT) is another type of investment vehicle which offers attractive tax breaks. The annual limit on investment where you can secure the tax breaks stands at £200,000. If you invest in a VCT you receive a 30% tax credit against your income tax liability for the year, so if you choose to invest say £5,000 you would slice £1,500 off your tax liability for the year. An added benefit of subscribing for shares in a VCT is that any dividends that you receive are exempt from the charge to income tax.
• Child Trust Funds are available to all children born after 31 August 2002 for whom child benefit is payable. The idea is that the amount invested on behalf of these children will grow tax free and then be available to them as a lump sum when they reach 18 years of age.
  The Government makes the initial contribution to the fund of either £250, or in situations where the family income is under about £15,500 per annum for Child Tax Credits purposes they invest £500. They will then add a further payment to the fund when the child reaches 7 years of age. Up to £1,200 per annum can be added to child trust funds by family and friends of the child.

  We would recommend that specific investment advice should be taken before investing into any of the products mentioned above. One of the independent financial advisers at our sister company Dodd Murray Ltd will be pleased to discuss these issues with you.

  Annual Allowances

  • UK taxpayers have an annual income tax allowance, which for the current 2008/09 tax year stands at £6,035 for anybody who is under 65 at the end of the tax year.  Higher allowances are available to people who are 65 and over but these are subject to an income limit.  Family members should consider structuring their financial affairs so that every person utilises this allowance. This could involve holding investments in the name of the spouses who pays tax at a lower rate, or possibly paying your spouse or children for the work that they do within your business.
  • The capital gains tax annual exemption has been set at £9,600 for the 2008/09 tax year. If you are considering selling an asset you should consider whether it would be beneficial for the asset to be owned jointly with your spouse so that two allowances are available. Care should however be taken to ensure that by transferring assets you do not lose out on any of the other capital taxes reliefs that may be available to you.
  • For inheritance tax purposes you are able to make gifts of up to £3,000 per tax year, with the amount of the gift then falling outside the value of your estate at death. In addition to this limit you can make smaller gifts of up to £250 per tax year to as many people as you wish. The Nil Rate band for Inheritance Tax on death has been increased to £312,000 per person for the 2008/09 tax year. If the value of assets you own is above this amount then you should consider whether any tax planning can be done to help limit your exposure to this tax. I would also recommend that people should ensure that they have an up to date Will so that they can ensure that their assets pass to the people that they wish to receive them after their death.
  • For people working in specific trades or professions it is possible to make a claim for a Fixed Rate Expense Allowance. This is strictly for the upkeep of tools and special clothing, but it can be claimed by all taxpayers within specific groups. Examples of the rates for the 2008/09 tax year are £100 for agricultural workers, £140 for joiners, £60 for people in the food industry and £100 for nurses. With the basic rate of tax standing at 20% for the current year, a nurse would be able to save £20 of tax in 2008/09 by making a claim. This is not a large amount, but if allowances have not been claimed in previous years you can go back and claim them for the last six years.

  Although not an annual allowance one final tip to consider at the current time would be to file your PAYE annual return online for your business. If you have fewer than 50 employees the government will pay you a tax free incentive payment of £75 for taking this course of action. It is going to be compulsory to file your return online for 2009/10 onwards, so you might as well take advantage of this tax free money whilst you have the chance.

  If you have any queries on the points mentioned above please do not hesitate to contact me.