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Personal Savings Allowance
A new Personal Savings Allowance will apply to income such
as bank and building society interest from 6 April 2016. The
allowance will apply for up to £1,000 of a basic rate taxpayer’s
savings income, and up to £500 of a higher rate taxpayer’s
savings income each year. The Personal Savings Allowance
will provide basic and higher rate taxpayers with a tax saving
of up to £200 each year. The allowance will not be available
for additional rate taxpayers and will be in addition to the tax
advantages currently available to savers from ISAs.
Asset transferral
Planning can be hindered by the potential for tax charges to
arise when assets are moved between members of the family.
Most gifts are potentially taxable as if they were disposals at
market value, with a resulting exposure to CGT and IHT.
However, special rules govern the transfer of assets between
spouses. In many cases for both CGT and IHT there is no tax
charge, but there are some exceptions – please contact us
for further advice. In addition, gifts must be outright to be
effective for tax, and must not comprise a right only to income.
Careful timing and advance discussion with us are essential.
The 45% and (hidden) 60% rates
The top rate of income tax, for those with taxable income in
excess of £150,000, is 45% (37.5% for dividends). Personal
allowances are scaled back if ‘adjusted net income’ exceeds
£100,000. The personal allowance is reduced by £1 for every £2
of income in excess of that limit. This means that an individual
with total taxable income of £121,200 or more will not be
entitled to any personal allowance. This gives an effective tax
rate on this slice of income of 60%.
It may be possible to reduce your taxable income and retain
your allowances, if approached with due consideration, eg. by
making pension contributions or Gift Aid donations. Contact us
now for advice on minimising the impact of the top tax rates.
Another hidden high tax rate
A charge arises on a taxpayer who has adjusted net income over
£50,000 in a tax year where either they or their partner are in
receipt of Child Benefit for the year. Where both partners have
adjusted net income in excess of £50,000 the charge applies to
the partner with the higher income.
The income tax charge applies at a rate of 1% of the full Child
Benefit award for each £100 of income between £50,000 and
£60,000. The charge on taxpayers with income above £60,000
will be equal to the amount of Child Benefit paid.
Claimants may elect not to receive Child Benefit if they or their
partner do not wish to pay the charge. Equalising income can
help to reduce the charge for some families.
Case Study
David and Helen have two children and receive £1,770 Child
Benefit for 2014/15. Helen has little income. David’s income
is over £60,000 for the 2014/15 tax year. So the tax charge
on David is £1,770.
For 2015/16 the Child Benefit for two children amounts to
£1,789 per annum. David expects his adjusted net income
to be £55,000. On this basis the tax charge will be £895.
This is calculated as £1,789 x 50% (£55,000 - £50,000 =
£5,000/£100 x 1%).
If David can reduce his income by a further £5,000 no
charge would arise. This could be achieved by transferring
investments to Helen or by making additional pension or
Gift Aid payments.
Cap on reliefs
There is a ‘cap’ on certain otherwise unlimited tax reliefs
(excluding charitable donations) of the greater of £50,000 and
25% of your income. This cap applies to relief for trading losses
and certain types of qualifying interest.
Assisting your children financially
University is an expensive prospect these days, and beyond this
lies the challenge of finding a deposit for a home. The sooner
you start planning for these expenses, the better.
All children have their own personal allowance, so income up to
£10,600 escapes tax this year, as long as it does not originate
from parental gifts. If income from parental gifts exceeds £100
(gross), the parent is taxed on it unless the child has reached
18, or married. Consequently parental gifts should perhaps be
invested to produce tax-free income, or in a cash or stocks and
shares Junior Individual Savings Account (JISA).
For younger family members, the JISA offers the opportunity for
parents and other family members to build a fund to help offset
university expenses and minimise debt at the start of the child’s
working life. The £100 limit does not apply to gifts into JISAs or
National Savings Children’s Bonds. From April 2015 pre-existing
Child Trust Funds can be converted to JISAs.
The Government has also announced the introduction of a new
Help to Buy ISA, which will provide a tax-free savings account
for first time buyers wishing to save for a home: please see the
‘Savings and investment strategies’ section.
Generation skipping
If your child is grown up and financially secure, it may be
worth ‘skipping’ a generation as income from capital gifted by
grandparents or more remote relatives will usually be taxed as
the child’s, as will income distributions from a trust funded by
such capital.