How to use tax rules to your advantage

Wealthy individuals can still rely on simple tax planning measures to maximise their income and investment returns, despite government scrutiny of the avoidance schemes used by some of the UK's highest earners.

Those with high incomes are still able to make use of the less contentious reliefs and should do so as soon as possible to ensure they benefit from these legitimate tax breaks for the rest of the 2012-2013 tax year, which started last week.

“There are lots of legitimate ways to get tax relief and taxpayers should consider setting these up now rather than at the end of the tax year so they don’t miss out on a whole year’s worth of tax-efficient returns,” said Andrew Cross, Director of Arcus Taxation Accountants.

Here are some ways to make the most of the current tax rules without falling foul of HM Revenue & Customs (HMRC).

1. Use all personal allowances

Wealthy couples can structure their finances to make use of both spouses’ tax reliefs and personal tax allowances.

Everyone is entitled to receive annual income of £8,105 in the 2012-12 tax year before any income tax is charged and, at age 65, this rises to £10,500 under the additional age-related personal allowance.

By ensuring income is received by both partners, an older couple can effectively combine their allowances to achieve a tax-free household income of as much as £21,000.

Transferring income-producing assets between partners can also ensure income above the tax-free allowance is liable to tax at a lower rate.

All taxpayers are also entitled to realise capital gains of up to £10,600 tax free in the 2012-2013 tax year. This tax allowance is worth £2,968 if you are a higher rate taxpayer or £1,908 if you are a basic rate taxpayer.

2. Maximise pension contributions

Pension contributions remain the most tax efficient investment for most individuals. Higher earners can also make contributions this year out of income that would otherwise be taxed at 50%, rather than the 45% top rate coming in from April 2013.

Higher earners who have not used up their £50,000 annual contribution allowances from previous tax years can also benefit from the 'carry forward' facility – which allows them to catch up on contributions not made in the past three years.

3. Defer income

Individuals paying 50% income tax may want to consider deferring income from savings, where possible, until after April 2013.  By doing this, tax can be paid at 45% in 2013-2014, rather than 50% now.  Also, if the top rate of tax falls further as predicted by many, that saving will only increase.

Deferral can be achieved by using offshore bonds, for example. These wrappers allow higher and additional rate taxpayers to defer paying tax on investments because no taxable income arises until the final payout.

It is also possible for employees  to exchange some of their salary for other benefits, in order to reduce their taxable income in the current tax year. Some of simplest ways of doing this include making higher pension contributions and buying childcare vouchers.

For example, for those earning £43,000 a year, having £2,000 go directly into a pension scheme will keep them in the basic-rate income tax band not only this year, but also next year when the threshold is lowered from April.

4. Make charitable donations

Those paying income tax at the 40 and 50% can claim tax relief for donations made under Gift Aid. However, to do so you need to ensure that you keep a record of each donation made throughout the year and then include the details on your self-assessment tax return.

5. Use tax efficient investments

Individual savings accounts (ISAs) offer investors a number of tax breaks: tax-free interest and capital gains, and no further tax to declare of pay on dividends. In this tax year, the annual ISA allowance has risen to £11,280, of which £5,640 can be held in cash. Parents and guardians can also contribute up to £3,600 a year into a Junior ISA for under 18s.

The key to investing in ISAs is to do it early in the year to make the most of the compounding effect on the interest.  Any growth in investment resulting from an ISA is tax-free.

Higher-risk investment schemes offer further tax benefits. Venture capital trusts (VCTs) and enterprise investment schemes (EISs) give 30% upfront tax relief on investments into small growth companies. VCTs can also pay tax-free dividends, while EISs offer an inheritance tax exemption once held for two years.

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the ability to identify problems and offer solutions quickly and painlessly!

Barbara, Oakham

knowledgeable & able to explain the options available to me in a language I could understand

Nigel, Corby Glen

Andrew has proved to be entirely trustworthy and has produced consistently reliable tax returns for me

Mr F from Lincolnshire

© 2020 Arcus Taxation Accountants is the trading name of Arcus Associates Ltd. Registered in England & Wales Company No. 05065405.

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