Personal tax planning guidance for the 2019-20 tax year
It's a good time to review your tax affairs to ensure you're taking advantage of all available allowances
The new tax year started on 6 April and brings a number of important changes, making it a good time to review your tax affairs to make sure that you are taking advantage of all available reliefs and allowances. This guide from New Forest Tax Accountants provides some personal tax planning suggestions. Your particular circumstances must be considered as further opportunities might be available to you.
For 2019-2020, the personal allowance has risen to £12,500. The level at which income tax is charged at the higher rate of 40% has been increased by £350.
The income limit of the personal allowance remains at £100,000; after which the personal allowance is gradually withdrawn by £1 for every £2 of income over £100,000.
The income tax basic rate remains at 20% of income, with the limit increased to £37,500. Earnings between £37,501 and £150,000 will pay the higher rate of 40% Income Tax (see table adjacent for proposed Scottish rate of income tax payable on non-savings and non-dividend income for those defined as Scottish taxpayers).
Where income exceeds £150,000 it is taxed at the additional rate of 45%. Income between £100,000 and £125,000 is taxed at 60% due to the gradual withdrawal of the personal allowance. The upper limit is £100,000 plus double the personal allowance as it is reduced by 2 for 1. If possible, individuals with income approaching these thresholds should consider ways of reducing their income to keep it below these levels.
Spouses and civil partners who cannot claim the married couples allowance can transfer some of their personal allowance to each other to save tax. The transfer is not available where either spouse/partner pays income tax at higher rates. The limit for 2019-20 has increased to £1,250.
High income child benefit charge
Where taxable income exceeds £50,000 (or that of a partner) and child benefit is being claimed, there is a clawback of the child benefit at the rate of 1% of the benefit for every £100 of income over £50,000. The financial benefit of claiming child benefit is lost entirely where individual taxable income reaches £60,000. Care should therefore be taken where possible to keep individual taxable income below £50,000 to avoid the clawback, see ‘Beat the Tax Band’ below.
During 2019-2020, the first £2,000 of dividend income can be received tax-free. Dividends above this level will be taxed at the following rates based on the recipient’s highest rate of Income Tax: 7.5% (ordinary rate), 32.5% (upper rate) and 38.1% (additional rate).
The £2,000 is a zero rate and NOT an exemption. In other words, even if you receive dividends of £2,000 or less, they still get added to your total earnings and could affect other elements, such as your child allowance and tax band.
Savings and Investments
Personal Savings Allowance (PSA) provides exemption of of savings income up to £1,000 (basic rate taxpayers) and up to £500 (higher rate taxpayers); PSA is not available to additional rate Income Tax payers. These benefits are in addition to the tax advantages offered from ISAs.
The amount that can be put into an Individual Savings Account (ISA) throughout the course of the year has been retained at £20,000. This provides an excellent tax planning opportunity for individual investors as ISAs represent an extremely tax efficient manner of withdrawing income, whether that be prior or during retirement, and can be used successfully alongside other investment vehicles such as pensions or investment accounts that are subject to Capital Gains Tax.
Where there are children aged 16 or over who would like to buy a home, funds could be gifted to to enable investment in a Help to Buy ISA, these are available for 4 years from autumn 2015 to assist first time buyers.
Main Residence Nil Rate Band
The eagerly awaited Main Residence Nil Rate Band is being phased in over 4 tax years. For the 2019-2020 tax year the Main Residence Nil Rate Allowance is £150,000. This, in addition to the Inheritance Tax Nil Rate Band of £325,000, could provide an overall individual inheritance nil rate band of £475,000 this year, rising to £500,000 in 2020. If married this could provide a £1,000,000 Nil Rate Band!
However, there are a number of restrictions and rules associated with this allowance, please contact us for more information.
Capital Gains Tax
The Capital Gains Tax (CGT) annual exempt amount has risen slightly to £12,000. If you have used up your allowance, consider deferring selling assets until the next tax year or transferring them to a partner who pays tax at a lower rate.
Attractive income tax reliefs are also available for investments into Venture Capital Trusts, Seed Enterprise Investments Schemes and Enterprise Investment Schemes, please contact us for more information.
The limit for tax free room letting is unchanged at £7,500, but the rules and regulations have been tightened up - you must be living in the property when a room is let.
Beat the tax band!
- Individuals with incomes near the £100,000 or £150,000 thresholds could reduce their taxable income below the threshold by making contributions to pensions or charities.
- Consider transferring income yielding assets (e.g. private company shares) to your spouse or civil partner who may pay tax at a lower rate or pay no tax at all. Such transfers must be outright gifts without conditions.
- Each child under 18 can have their own Junior ISA. Parents and grandparents can contribute up to £4, 368 a year tax free for each child.
- If you can vary your self-employed income, make sure that your 2019-20 income tax payments on account are not too high: better in your bank account than in that of HMRC!
- Income can be reduced through maximising claims for certain tax reliefs or through making certain business investments. We can explain which claims and investments are available for this.
- You may be able to transfer private company shares to use exemptions and rate bands of your spouse and other family members. Remember to consider Inheritance Tax (IHT).
- Reduce Capital Gains Tax (CGT) charges from 28% to 18%. It may be possible to transfer assets to a spouse or civil partner.
- Entrepreneurs Relief allows you to pay a reduced rate of CGT at 10% up to a lifetime limit of £10million capital gains. The rules are complex, call to discuss!
- Small company owners (especially family-companies) should consider the way dividends are paid to ensure optimum use of the £2,000 dividend allowance.
- An increasing number of employers allow employees to sacrifice a cash payment for approved share options, benefits in kind or pension contributions in lieu of salary.
- The provision of a company car is now a highly taxed benefit and alternatives should be considered.
Key Dates for Tax Returns
Deadlines for the submission of Self Assessment Tax Returns (SATR) for 2018-19 tax year are as follows:
- Paper version 31 October 2019
- Online version 31 January 2020
- To have unpaid tax of up to £3,000 collected through the 2021-22 PAYE code, SATR must be completed by 30 December 2020.
Although tempting to leave until the autumn (or even January!), it is well worth completing your personal tax return sooner rather than later. Promptly completed tax returns can provide improved cashflow and will definitely enhance your ability to plan your tax affairs for the subsequent tax year.
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Disclaimer: The information above does not constitute individual advice. New Forest Tax Accountants will not accept any responsibility decisions taken or not taken on the basis of the information above. Any reference to legislation and tax is based on our understanding of U.K. Law and HMRC practice at the date of publication of this guidance. Specific advice should always be obtained prior to taking or not taking any actions.