ISA's can allow clients to preserve their income tax allowances and CGT annual exemptions when compared with taxable investments. The current ISA limit is £15,240.
Pension contributions made before 6 April 2016 obtain higher / additional rate income tax relief depending on the individual’s income tax position. Furthermore, some clients may be able to exploit an annual allowance greater than £40,000 in 2015/2016 following the Budget in July.
Carry forward can be used to bring forward unused annual allowances from the three previous tax years to make pension contributions in excess of the annual allowance in 2015/2016. Carry forward must be used before 6 April 2016 to make sure the 2012/2013 annual allowance is fully used up.
Other pension planning points include:
- Those with income expected to fluctuate around the higher rate income tax threshold could consider delaying contributions until a later year when higher rates of tax relief might be achieved. But those with income and employer pension contributions above £150,000 per annum must consider the restriction in the annual allowance they may suffer from 6 April 2016.
- A client considering cashing in an investment bond may be able to save higher rate income tax on the encashment by combining it with a pension contribution. The encashment and the pension contribution must both be made before 6 April 2016.
- The income tax personal allowance can be reclaimed by making a pension contribution to reduce ‘adjusted net income’ below £100,000 in 2015/2016.
- Equally, child benefit claimants who are set to lose some or all of their entitlement for the year should consider whether a pension contribution will enable them to retain some or all of this benefit. Contributions must be made before 6 April 2016.
- Those who will benefit from making an application for Individual Protection 2014 have until the 5 April 2017 to do so.
- Those that will be applying for Fixed Protection 2016 must cease all contributions by 5 April 2016 and cannot set up any new plans after this date.
Income tax can be saved by transferring income-producing investments to a lower or non-taxpaying spouse or civil partner on a ‘no strings attached’ basis. A bank deposit, for example, could be transferred to a spouse with no earnings to make use of their personal allowance and 0% tax band. Tax on a significant amount of interest could be saved by doing this.
Switching investments into a non-income-producing form can keep adjusted net income below the limits mentioned above to preserve or reclaim the personal allowances or child benefit. Switching a deposit into an ISA or an investment bond is one way this could be achieved.
Losses on capital assets can be realised and offset against capital gains in the current year potentially reducing net gains to below the level of the annual CGT exemption. Excess capital losses brought forward from previous tax years are offset against net gains in the current year to the extent that they reduce losses to the level of the annual CGT exemption.
Inheritance tax can be saved by using the annual exemption to make gifts of up to £3,000 before the end of the tax year. Any unused allowance from 2014/2015 will be lost if it is not used up before 6 April 2016.
Bank accounts that are due to pay interest after 5 April 2016 could be closed before 6 April to trigger receipt of interest now, provided that there are no early termination penalties.
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