Tax Tips for Individuals

In this month’s tax update, we will discuss some tax tips for individuals.

Please note that the rates referred to throughout the blog are noted for the 2017/18 tax year which runs from the 6th April 2017 – 5th April 2018.

It will be key to think about any of the options discussed in this blog prior to the end of the current tax year, being 5th April 2018.

Use of Yearly Allowances

Everyone gets a range of allowances to use each tax year as below:

The Personal Allowance (Income Tax)

Everyone receives a personal allowance for income tax each tax year, the current personal allowance is £11,500. The personal allowance is the level of income an individual can receive before they suffer any income tax and therefore is effectively tax-free income.

Please note that the personal allowance is restricted if you earn over £100,000 during the tax year

The Dividend Allowance

Everyone also receives a £5,000 dividend allowance, dividend income within the dividend allowance is taxed at the dividend nil rate of 0%.

The Personal Savings Allowance

From 2016/17 a savings nil rate (0%) applies to taxable interest income within an individual’s savings allowance, the allowance received depends on that band of taxation that the individual falls into during the tax year as below:

Basic rate: £1,000

Higher rate: £500

Additional rate: nil

Capital Gain Tax Annual Exemption

Everyone gets a tax-free allowance of £11,300 to use against capital gains during the 2017/18 tax year.

Spousal Exemption for CGT purposes

Spouses may make transfers to each other on a ‘No Gain No Loss Basis’, meaning no Capital Gains Tax will be due. This can be an effective tax planning tool when using capital losses or annual exemptions that a spouse has remaining.

It is efficient tax planning to ensure that everyone makes use of the tax free allowances offered to them each tax year.

 

Tax Reducers

Transferable Personal Allowance/ Marriage Allowance (‘MA’)

The Marriage Allowance allows certain individuals who are married or in a civil partnership to elect to transfer some of their personal allowance to their spouse or civil partner. The election will be of help to couples where one of the spouses either has insufficient income to utilise his or her personal allowance or has income which is taxed at 0%, for example because it falls wholly within the starting rate band for savings income.

The amount of the personal allowance which can be transferred is 10% of the personal allowance. The recipient obtains a reduction in his income tax liability (a tax reducer) equal to 20% of the transferred amount. We therefore reduce the tax liability by £1,150 x 20% = £230. This reducer cannot result in a repayment of tax due.

The following conditions must be met for an individual to qualify:

  • Must be married or in a Civil Partnership
  • Neither spouse must pay tax at the higher rate (i.e. 40% rate)
  • Election must be made within 4 years of the end of the tax year to which it applies

EIS/SEIS Investments

Investing in shares within the EIS and SEIS these schemes can result in a tax reducer as below:

EIS: 30% of the amount invested up to an annual limit of £1,000,000 (max relief £300,000)

SEIS: 50% of the amount invested up to an annual limit of £100,000 (max relief £50,000)

Losses

Rental Losses

Rental losses generated during a tax year can be carried forward against future rental profits.

There are many expenses which individuals do not realise they are able to deduct from rental profits during the tax year i.e. replacement of carpets, decorating expenses etc.

Capital Losses

Capital losses generated from the sale of a capital assets i.e. shares, property etc. can be carried forward to use against future gains arising.

Losses generated must be used against current year gains in priority during the tax year.