February 23rd, 2015
Year-end tax planning 2014/15
Depending on personal circumstances, an individual may be able to take certain actions before the end of the tax year on 5 April that will reduce his or her income tax and/or capital gains tax liability. This article covers just a few of those possible actions with particular reference to the tax year ending on 5 April 2015. As free content, it is not intended to cover all possibilities.
'Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be': the celebrated words of Lord Tomlin in the Duke of Westminster case (Duke of Westminster v CIR, HL 1935, 19 TC 490). Whilst we are currently seeing in our society a huge backlash against the more aggressive form of tax avoidance, usually involving the use of marketed schemes, the Duke of Westminster maxim still holds true when applied to the kind of widely accepted tax planning ideas outlined in this article.
Tax planning should always be an ongoing process, but life tends to get in the way. In many cases it will be towards the end of the tax year that people turn their minds to tax. This is not such a bad thing as one has by then a pretty good idea of the new things the following tax year has in store. This is not so much the case in 2015 as we may well have a new Government in the UK after 7 May (General Election day), and who knows what changes it may wring; this doesn't prevent action being taken before 6 April but is something to be borne in mind. For example, it is possible that the 50% rate of income tax will be restored for those on high incomes, but at the time of writing this can only be pure guesswork.
Whereas the taxable income of many individuals will remain fairly constant from one tax year to the next, a significant number of people will find that their incomes fluctuate from year to year. This is sometimes caused by a one-off receipt, for example compensation of a taxable nature or a bonus and sometimes by fluctuating business profits. One feature of year-end tax planning is to arrange wherever possible the timing of income receipts and allowable expenditure so as to even out taxable income and avoid particularly high tax rates in any one year. There is, for example, a 20% jump in tax rates once the basic rate limit is exceeded. This uplift is increased to 22.5% where dividend income is involved.
The basic rate limit is £31,865 for 2014/15, which means that for those born after 5 April 1948 higher rate tax is payable on income above £41,865 (the basic rate limit plus the £10,000 personal allowance). It has already been announced that the basic rate limit for 2015/16 will be £31,785 and the personal allowance will be £10,600.