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Tax Year End Planning 5 April 2011.  Issued March 2011

Once again the end of tax year is fast approaching. But did you know that this year, nine out of ten people in the UK, that’s 45 million people, will waste, on average, over £222 each by giving unnecessary tax to the Chancellor?

Research commissioned last year by IFA Promotions (www.ifap.org an organisation promoting independent financial advice) found where most tax is wasted.

What we waste in tax:

• £2.24 billion in tax by not planning properly to avoid Inheritance Tax liabilities.
• £144 million wasted by not using our ISA allowances in full.
• £500 million wasted by late submission of self-assessment tax returns or getting them wrong.
•  £349 million wasted by not using our personal allowances properly or by not reclaiming overpaid tax on savings interest
• £720 million could be spared by optimising contributions to personal or company pensions and getting full tax relief.
• £171 million is up for grabs if we and our employers use share option schemes properly.
• £309 million lost by not using our capital gains tax allowances.
• £1.14 billion more could go to good causes by making our charitable gifts in the right way rather than gifting anonymously.

Tax Saving Tips

Savings:
ISAs: Use your £10,200 annual ISA allowance – Shelter stock market investments in ISAs, or moving savings from an ordinary deposit or savings account to an ISA. Move even just the first £5,100 into a cash ISA will help.
Friendly Society Accounts: Everyone, including children, has a calendar year tax-free friendly society allowance of £270. You are allowed to save £25 per month or up to £270 as a lump sum in a Friendly Society Plan with no liability to tax. Parents can save on behalf of themselves and their children and save tax.
National Savings & Investments as additional tax-free savings options. There are many types of National Savings Products to suit people of all ages whether children, working, not working or retired that pay no tax.
Investment Bonds: Up to 5% a year ‘income’ can be taken from an investment bond with the tax deferred for 20 years. There is no need to declare this an income and if you are a taxpayer now – you pay no tax if you are a basic or lower rate taxpayer at the 20th anniversary. This is especially attractive for Higher Rate Tax Payers – who may be Basic Rate Tax Payers in 20 years. It is also attractive for pensioners, as investment bond ‘income’ below 5% does not reduce the additional personal (age) allowance.

Pensions:
Tax Relief: If you are working, by paying into a pension you save up to 20% tax relief on personal contributions and if you run a business, your company can also save tax and national insurance by paying into a pension for you. Higher Rate Tax Payers: If you pay 40% or 50% income tax, you are able to obtain tax relief on contributions within certain limits on payments that you make to pensions. £100 in your pension fund may actually cost you just £50 or £60.
If you do not work, have children, grandchildren or are retired (below age 75) consider saving in a Stakeholder pension. These people can have invested for them up to a maximum of £2,808 this year by somebody else. With tax relief of 28p for every £1 saved, the government make this up to £1.28. If you invest the full allowance of £2,808 this gets tax relief of £792 worth making a pensions savings pot with tax relief of £3,600.

Cash Savings:
Non Tax Payers and Children: You pay tax on interest received from a Bank or Building Society accounts unless it is in a special tax-free account. Make sure you complete a R85 form to ensure that interest is paid with no income tax deducted.
Joint Accounts: If one of you does not pay tax, talk to the bank or building society about only paying tax on the interest on half the amount or better still, change the savings account into the name of the non-taxpayer only.

Higher Rate Tax Payers: You pay higher tax on income from savings interest, dividends, unit trusts and many others, which are claimed via self-assessment. Consider saving in Investment Bonds. Income Tax can be deferred for up to 20 years. In 20 years you may not be a higher rate taxpayer and may reduce or completely avoid paying tax at that time.
Children and Adults: A child or adult can receive up to £70 interest per year tax free from National Savings ordinary savings accounts. Why pay tax on interest?
Parents: Can make gifts of money into children’s savings accounts. Gross interest of up to £100 per parent is allowed on the individual child's savings account that is not taxed as if it were the parents’ income.
Grandparents: Gifts to children of money from anybody else other than parents e.g. grandparents. There is no limit on the amount of interest that can be paid which does not affect the income tax position of the person giving the money.

Capital Gains Tax:
Tax Free Allowance: Each year use your gains Allowance of £10,100. You can realise gains/profits of this amount and not pay up to 28% tax on the gain.
Losses: If you have made losses you can offset these against gains or carry them forward indefinitely.
Second Properties: You are liable to CGT on the sale of any second property - with careful changes in ownership of the property and perhaps making it your permanent home for a period – you could slash the tax bill due.

Inheritance Tax:
Save £130,000: Adding all your assets together including your home, are you worth more than £325,000? If you are then on death an Inheritance tax bill may be due. Adding a simple clause to your Will can save up to £130,000 in Inheritance Tax. This is called a Will Trust.
Gifting: £3,000 annual gifting allowance. You can make gifts to whoever you choose each year to reduce your inheritance tax bill. You are allowed to carry over any unused allowance for 1 year. So if you did not make a gift last year, you can gift £6,000 this year. You can also give up to £250 to as many other people as you like.
Trusts: Put your life insurance policies in trust. Any benefits on death are paid out more quickly to the people you care about. Using trusts for investments can also reduce your inheritance tax bill.

Tax Returns and Benefits:
Self-Assessment Filing: People waste hundreds of pounds each year by not completing their return in time
6 Million Tax Codes Wrong in 2010: Check the tax code on your payslip and with your Inspector of Taxes. It is staggering how many people were issued the wrong tax code that means we pay more tax.
Non-tax payers: Contact the HM Revenue and Customs and ensure that you claim back any tax that you may have paid.
Irregular Income: If you are retired or receive irregular income from pensions, bank and building society accounts and/or investments. Contact your tax office to see if you are due a refund. You can even go back six years. HM Revenue and Customs will send you a short form to complete - it can't hurt!