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Wednesday, 29 July 2015

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Budget tax changes make it all the more important not to waste allowances

Last week’s Budget included tax changes for many of us and next week will see the start of a new tax year (on April 6 – I know it is a strange date to start the year but…).

Tax has been in the headlines with “granny tax”, “tycoon tax” and “mansion tax” entering the vocabulary for the first time.

Nicknames are all well and good but many of us will be considering whether there is anything we should be doing before the new year dawns.

In many cases the answer to that is a resounding... perhaps.

At the most basic level we should be considering whether there is anything we can do to avoid wasting those tax allowances which are annual and run out next month.

The most popular of these is the ISA allowance where up to £10,680 can be put into an ISA during the current tax year – for those who are uncomfortable with stock markets, the figure is half that for a cash ISA.

Particularly, for those taking the stocks market route, it has been possible to build up quite large sums over the last few years which are entirely and permanently free of income tax and capital gains tax.

One result of the Budget will be to make more of us higher rate taxpayers and this exemption is a valuable one.

Tax allowances will go up for most of us but the overall limit at which higher rate tax starts to be due will remain the same. It might still be worth looking at triggering income this year to avoid going into the higher rate band next year.

With a bank deposit account this can usually be done quite simply by closing the account although you should obviously check there are no penalties first – as well as doing the arithmetic on tax rates.

Remember also that the clawback of child benefit through the tax system starts next January for those with incomes (not just earnings) of more than £50,000.

If you are one of those earning enough to pay 50 per cent tax you might, conversely, want to delay income until after April 2013 when the top band falls to 45 per cent.

The most wasted tax allowance is that for capital gains.

The stock market has been on a good run recently and there will be some who are now sitting on decent gains.

Up to £10,600 of gains can be realised tax-free this year but do take care not to reinvest in the same companies within 30 days as this undoes your tax planning.

‘Bed and breakfasting’, as this is called, used to be very popular at one time but is now much more difficult to do effectively.

Those feeling generous might also remember that up to £3,000 can be given away free of inheritance tax each year.

Bigger gifts are also usually exempt if you survive for more than seven years but time of death is (fortunately) unpredictable and the use of the annual exemption is often good sensible planning.

The message is clear with these tax allowances. Use them or lose them.


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