Financial year end checklist: 5 April 2013

The current financial year ends of 5 April 2013. Jonathon Clark of Barchester Green Investment has produced a checklist of some of the main planning opportunities to consider – hopefully well in advance of 5 April.

[caption id="attachment_2076" align="aligncenter" width="492"]2013 disappearing on beach Does the end of the financial year seem to arrive more quickly each year? We actually have more time now than in years gone by as the financial year end used to be 25 March. When ten days got chopped out of the calendar in September 1752 the 25 March became the 5 April and the financial year end has remained there ever since.[/caption] 1. Use your ISA allowance 2. Review contributions to your pension plan 3. Review timing of forthcoming expenditure on buy to let properties 4. Review timing of significant business expenditure 5. Use the annual exemption for Inheritance Tax 6. Use your annual Capital Gains Tax Allowance to best effect 7. Delay Your 2012–13 Dividend If It Will Increase Your Tax Rate This Year 8. Avoid the “60% rate” of Income Tax if you can 9. Quit your job, start a business, or close a business at the right time 10. Review your charitable donations for the year

1. Use Your ISA Allowance

The Individual Savings Account has been with us since 1999. Everyone over the age of eighteen is allowed to contribute up to £11,280 to a stocks and shares ISA in the current tax year. If you want to put money into a mix of cash and stocks and shares then you can contribute up to £5,640 into a cash ISA and use the balance of the allowance – another £5,640 – for a stocks and shares ISA. Junior ISAs are available for anyone under the age of eighteen who was not eligible for the Child Trust Fund. If you don’t have money available to put into an ISA this year then consider making use of the allowance by transferring other assets into an ISA such as assets held in Investment Funds, OEICS, unit trusts or shares. If some of these assets are showing a gain then you will be able to offset it against your annual Capital Gains Tax allowance (see below) and place more of your money into a tax friendly environment.

2. Pension contributions

The Government has been busily reducing the amount that can be placed into a pension fund each year and still obtain tax relief. The limit in the current tax year is £50,000 gross and for personal pensions (whether an individual arrangement or one operated by an employer) this means the total contributions by employer and employee. Interestingly the government has chosen (to date) to restrict the total contributions rather than the level of tax relief so contributions will still reduce your tax bill by forty pence in the pound if you are a higher rate taxpayer (40%) and fifty pence in the pound if you are an additional rate taxpayer (50%). The top rate reduces to 45% next year so contributions made this year by anyone earning over £150,000 are more tax efficient than those made in the 2013–14 tax year. If you don’t have an income then you can still contribute £2,880 each year and the government will add £720 of tax relief (which you haven’t even paid) – that has to be one of the most tax efficient forms of saving! Modern pension plans are extremely flexible so, if you are worried about investing when the market is relatively high, you can place your money in a cash fund within the pension and switch into other funds later. Your adviser will be happy to explain the process in more detail – the essential thing is to ensure you meet the 5 April deadline.

3. Buy to Let Properties – Pay Expenses in the Best Year

If you are the owner of a property which is let to a tenant then repairs and refurbishments will become necessary from time to time. If your overall tax rate is going to change between 2012/13 and 2013/14 then make sure that any major expenditure is incurred in the year when your tax liability is higher. This is an area of some complexity which will be connected with the source of your other income. If you are an employee then your income for 2012–13 will be the salary (together with benefits and bonuses) payable in the year to 5 April 2013 but if you are self employed then it is the trading profit for the accounting year which ends in the financial year 2012–13. Special rules apply for the opening and closing years of a business so do speak to an adviser about this one before making a decision.

4. Incur Trading Expenditure in the Best Year

As with item 3 above – if you are self employed with variable income then expenditure which is not time critical should be incurred in the year where it will gain tax relief at the highest rate.

5. Use The Inheritance Tax Annual Exemption

Inheritance Tax (IHT) is levied at 40% on estates over £325,000 at death – a limit which has been in place since 2009/10 and which is unlikely to change before 2015/16. Most gifts made during your lifetime will be exempt from IHT provided you survive seven years but there is an annual allowance of £3,000 per person which you can give away each year – the value of this allowance has remained unchanged since 1984. It may not seem a significant figure at first sight but if a married couple each give away £3,000 every year then, after ten years, their estate will have been reduced by £60,000 taking £24,000 off the final Inheritance Tax bill. If you didn’t make use of your allowance in 2011–12 you can bring the unused allowance forward, making the total allowance available for a husband and wife £12,000 if used by 5 April 2013.

6. Use Your CGT allowance

Capital Gains Tax is payable on disposal of investments and other assets once the gains exceed the £10,600 allowance in the current tax year. After that the tax is levied at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers. Remember, the £10,600 refers to gains not to proceeds so the cash you realise from an investment may considerably more than £10,600 as you have to deduct the original cost from the sale proceeds to calculate the gain. Capital Losses on investments can be set against Capital Gains in the current year or carried forward to offset against future gains so your investment review should also include whether to get rid of “no-hope” investments and at least use them to reduce gains elsewhere.

7. Delay Your 2012-13 Dividend If It Will Increase Your Tax Rate This Year

As mentioned above, the top rate of tax – on incomes over £150,000 – will fall from 50% to 45% for the next tax year, 2013–14. If taking additional income between now and 5 April is going to push you into this bracket and you have discretion over how you receive your income – possibly as the owner of your own company paying a dividend – then consider foregoing the dividend in this financial year and pay it out of next year’s profits. Although the 20% and 40% rates of tax will remain the same in this tax year and the next it is still worth reviewing any dividend payments to ensure that you are not paying unnecessary tax if changing the date of payment will keep you as a basic rate taxpayer in both years.

8. Avoid the “60% Rate of Income Tax”

The most critical level of income is between £100,000 and £116,210 per annum. In this range, the personal allowance of £8,105 is withdrawn at the rate of £1 for every £2 of income earned. The effect is that the tax on income earned in this bracket is a whopping 60%. Just to put things in perspective, a 60% rate of income tax was considered a great relief when in was introduced in the 1979 budget – the previous top rate had been 83% with an additional 15% payable if the source of the income was from investments making a total tax rate of 98%. Mind you, VAT was increased from 8% to 15% at the same time so the Chancellor giveth and the Chancellor taketh away…

9. Quit Your Job – or Business – at the Right Time

If you are currently employed and are thinking about starting your own business then timing is everything. The rules for taxing profits in the opening and closing years of a business are complicated – even after they were simplified more than ten years ago. Choosing the right date to quit your job, start a business and stop trading are all decisions which should be made well in advance as they can have dramatic effects on the amount of tax you pay. The end of the financial year is a very good time to review such matters and requires expert advice in all cases.

10. Review Charitable Donations

Charitable donations gain tax relief at the highest rate – keep a record of these and enter them on your tax return. The amount which you pay to a charity is “grossed up” so that the charity reclaims tax at the basic rate. For example, if you donate £1,000 the charity will reclaim another 25% or £250 (20% of the gross contribution of £1,000 plus £250). When you enter the donation on your tax return, if the highest rate at which you pay income tax is 40% you will be granted tax relief of 40% on the gross donation. 20% of this (£250) has already been claimed by the charity but your tax bill will be reduced by a further 20% so that the real cost of your donation is £750 rather than £1,000. The same mechanism operates in respect of contributions to pension plans made by higher rate taxpayers. We hope this checklist will be useful during the last days of the 2012–13 tax year. For further information or advice please contact your Barchester financial adviser or call our specialist tax adviser, Mahtab Clark, on 01722 331 241.

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