The UK has one of the highest rates of personal income tax in the world (1), but there are several ways you can reduce your tax burden. Find out more about how the system works and the steps you can take to manage your tax affairs as effectively as possible.
From allowances to tax relief, there are a number of approaches you can take:
1. If you pay higher rate (40 per cent) or additional rate (45 per cent) tax, passing income-yielding assets to your lower-earning spouse or civil partner could potentially reduce the amount of tax you pay.
The annual contribution limit for an ISA is GBP20,000, which is lost if not used in the 19/20 tax year.
3. Consider moving towards investments liable to Capital Gains Tax (CGT) (20 per cent on most financial gains and 28 per cent on real estate), rather than Income Tax (IT), which has a top rate of 45 per cent. And don’t forget, there’s an annual exemption (2019/20) of GBP12,000 on capital gains. That said, the current disparity between CGT and IT rates is not guaranteed to continue (see point 4, below).
4. It may be worth realising capital gains now, so that they are chargeable at what are historically low rates (10 per cent/20 per cent/28 per cent). There is no guarantee that the newly-formed government will maintain CGT rates at current levels, which means rates could be further reduced in the future. This seems unlikely given the government’s ambitious spending plans, meaning it could be worth bringing forward the disposal of an asset to be taxed at the current rates.
5. Gift Aid can act as a valuable relief for donations to charities. The gift is made out of the donor’s taxed income, and the charity benefits by claiming the basic rate tax on the value of the gift.
6. Consider making use of Inheritance Tax reliefs and exemptions. These include the annual gifts exemption of GBP3,000 (GBP6,000 if no gifts were made during 2018/19), the small gift allowance of GBP250 per donee, gifts made in consideration of marriage, and regular gifts from excess income.
7. It may be worth making use of Individual Savings Accounts (ISAs). Income and gains that arise within an ISA are free of UK tax. The annual contribution limit is GBP20,000 (for the tax year 2019/20), which is lost if not used in a tax year.
Primary Principal Residence (PPR) changes
Two changes are being made that will impact the PPR relief that homeowners benefit from:
- When an individual acquires a property that they do not initially occupy, due to either a delay in selling their previous PPR, or construction works - HMRC will allow the individual to claim PPR relief for the first 12 months of ownership and, in certain circumstances, will by concession extend this period to 24 months
- Where a property has been an individual’s PPR, under the current rules, the final 18 months of ownership are always covered by PPR relief, even where the individual no longer occupies the property. This final period will be reduced to nine months with effect from 6 April 2020
This concession is to be included in CGT legislation from April 2020, meaning that all homeowners will be permitted a period of up to 24 months of non-occupation (for the reasons outlined above).
Entrepreneurs’ Relief (ER)
ER reduces the rate of CGT paid when some, or all, of a business is sold from 20 per cent to 10 per cent. Relief is restricted to lifetime gains of GBP10m. There are a number of conditions that must be met in order to qualify for ER. Broadly, these are:
- Employment - The individual must have been an employee, or officer, for at least two years prior to the disposal
- Activities - The interest that is being disposed of should be trading
- Ownership - The individual must hold at least 5 per cent of the shares (with voting rights) and be entitled to at least 5 per cent of profits and assets, or disposal proceeds
Investor Relief (IR)
Perhaps less well known than ER, IR also offers a CGT rate of 10 per cent on qualifying disposals, with a GBP10m lifetime limit separate to ER. Other conditions include:
- Three-year holding period to qualify
- The investor cannot generally be an employee or director while owning the shares
- Only available to newly issued shares (after 17 March 2016)
As mentioned above, gifts to a qualifying charity can help reduce your income tax liability. There are ways a gift can be made:
- A gift of qualifying shares (or land) means that the donor obtains income tax relief on the value of their donation as well as an exemption for CGT purposes.
- If you are a higher-rate taxpayer, you will be able to reclaim the difference between the basic and higher rates of income tax.
- Reduction to inheritance tax (IHT). Where legacies that represent 10 per cent of the total estate are left to charity, the rate of IHT is reduced from 40 per cent to 36 per cent.
For more information on how to make the tax system work for you, speak to your Relationship Manager or Wealth Planner, or seek advice from your professional tax advisor.
1Eight surprising facts about the UK tax system, BT, 2016