Year end tax planning 2012/2013

The Budget is scheduled for Wednesday 20 March, so your 2012/13 year-end tax planning should best be wrapped up before then.

The Chancellor’s 2012 Autumn Statement served as a reminder that the tax screws will continue to be turned in the years ahead, e.g. by limiting some tax band and exemption annual increases to under half the expected rate of inflation. The more the Treasury tries to extract revenue from you, the greater is the value of tax planning.  This does not mean contentious schemes based in offshore centres: as we explain below, there are many options to cut the Chancellor’s share, which are effective, but uncontroversial.

The Chancellor made two important announcements in his Autumn Statement, which could have a direct impact on your year-end pension planning:

  • The Annual Allowance, which sets the maximum total tax-efficient contribution that can be invested in pension plans by you or on your behalf during the tax year, will be cut from £50,000 to £40,000 from 6 April 2014.

  • The Lifetime Allowance, which sets maximum total tax-efficient value of pension benefits, will fall from £1.5m to £1.25m, again from the start of 2014/15. One, or possibly two, new transitional reliefs will be introduced which you can claim if you could be affected by this further reduction.

Alongside these future cuts, there are three other factors to consider:

  • 2012/13 is the last tax year (for the time being, at least) in which it will be possible to obtain 50% tax relief on a pension contribution, as the additional rate of tax falls to 45% in 2013/14.
  • 5 April 2013 will be the last opportunity to carry forward up to £50,000 of unused annual allowance from 2009/10.
  • The Shadow Chancellor, Ed Balls, recently renewed calls to limit tax relief on pension contributions to basic rate only for high earners.

All these points mean you should review your pension now to decide on your future retirement strategy and what action, if any, needs to be taken before the end of 2012/13.

On the other hand, if you are thinking of drawing your benefits in the next few months, it may pay you to wait until much nearer the end of the tax year. The Autumn Statement announced that the limit on capped income drawdown would be increased by 20%. Unfortunately no timing was given in the Statement, but the Treasury has since said that it hopes that the change will take effect for any newly initiated withdrawals from 26 March 2013.

Income Tax
There are several important changes to income tax from 6 April 2013 that could affect your planning, not only for the tax year-end, but also for the new tax year about to start:

  • The full impact of the new tax on child benefit will be felt from 2013/14. In the current tax year, the maximum effective claw back is generally only a quarter of the benefit paid. If your or your partner’s income exceeds £50,000 then you will be affected if either of you receive child benefit. Do nothing and you could face a substantial tax bill in January 2015.
  • The additional rate of tax, payable on taxable income over £150,000, will be cut to 45% (37.5% for dividends) from 50% (42.5%) from 6 April 2013. It could therefore be worthwhile to defer payment of bonuses and/or private company dividends until the new tax year begins. Some publicly quoted companies with a large proportion of individual shareholders on their registers may also delay dividend payments for the same reason, if the (opposite) experience of the introduction of 50% tax in 2010/11 is anything to go by.
  • The personal allowance will rise by £1,335 to £9,440 in 2013/14. Where one of a couple has no earnings or pension income, much or all of the allowance may be wasted. If you or your partner is in this situation, there are several strategies, which could be used to generate what is effectively tax-free income in 2013/14.
  • While the personal allowance is rising sharply next tax year, the starting point for higher rate tax is falling because the basic rate tax band will shrink by £2,360. This, and subsequent changes will drag many more people into the higher rate tax band. In the short term it might pay you to bring income forward, e.g. by closing an interest-paying account, if you are a basic rate taxpayer this year.

Individual Savings Accounts (ISAs)
The standard ISA contribution limit for 2012/13 is £11,280, of which up to £5,640 may be placed in a cash ISA. For the Junior ISA, launched a little over a year ago and largely ignored since, the limit is £3,600. The main ISA limit will rise by £240 for 2013/14 (£120 for the cash component), with the Junior ISA ceiling increasing by £120.

There are no carry forward provisions for ISA contributions, so maximising your investment each year is good practice. This need not mean finding cash – it is often possible to sell directly held investments and then repurchase them within the ISA framework. Not only does the exercise lead to your ISA being funded, it can also be a simple way of using part of your annual capital gains tax exemption.

The value of the income and capital gains tax shelter offered by ISAs has been increased by recent government announcements on the higher rate tax threshold and the CGT annual exemption:

  • There is no UK tax on dividends in a stocks and shares ISA, although tax credits cannot be reclaimed.
  • Interest is received UK tax-free in an ISA, other than from cash held in a stocks and shares ISA (for which a flat 20% rate applies).
  • There is no capital gains tax on profits.
  • ISA income and gains do not have to be reported on your tax return and are ignored for child benefit tax.

Despite these tax benefits, not all ISAs are attractive investments. In particular, the appeal of cash ISAs has fallen as the Bank of England’s Funding for Lending scheme has driven down short-term deposit rates. While variable rates of around 2.5% are on offer for new instant access ISAs, the quoted interest often contains a large bonus element – as much as 2% – that disappears after a year. If you arranged a cash ISA around this time last year – then with a rate of about 3% – you should check what interest your cash will be earning after the ISA’s first anniversary. You could find it is just 0.5%.

You can transfer an existing cash ISA to a stocks and shares ISA, but not vice versa. The one way trip can be worth considering if you want to increase your income. However, a move out of cash removes the security of a capital deposit, so should not be taken without advice.

In passing it is worth noting that in January 2013 the Office of Tax Simplification suggested that the little used 10% savings rate tax band should be scrapped and the resultant Exchequer tax savings be used to increase ISA limits.

Capital Gains Tax (CGT)
After an overhaul of the structure of CGT in 2010, for 2012/13 the Chancellor froze the annual exemption at £10,600. In the coming tax year there will be a (CPI) inflation-linked increase, but then 1% rises will apply for the next two years. By 2015/16 the annual exemption will be £11,100. If you have gains that you can realise on your investments, you ought to think about using your annual exemption to crystallise some profits before 6 April.  Systematically using your annual exemption can help you to avoid the situation where accumulated gains make it expensive to adjust your portfolio.  This year’s annual exemption could save you nearly £3,000 in tax if you are a higher or additional rate taxpayer.

If you cannot avoid capital gains tax, then take care with the timing of your gains and losses:

  • A gain realised on 5 April 2013 will mean tax payable on 31 January 2014.
  • A gain realised on 8 April 2013 (after the weekend) will mean tax payable on 31 January 2015.

The realisation of losses also needs careful timing. The general rule is that losses are set against gains made in the same tax year before the annual exemption is applied. Thus you should avoid realising losses in the same year as that in which you realise gains unless your gains exceed the annual exemption.

If you would like to discuss your year-end tax planning, please call us on 020 3865 2379


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