The run up to the tax year end is a good time to consider tax planning to maximise the use of an individual’s allowances, reliefs and exemptions for the current tax year. Some of these will be lost if not used before the tax year end. For those people who currently pay income tax at the higher rate (40%) and additional rate (45%), tax planning is absolutely vital as a means of minimising tax payable and so maximising net income, capital gains and wealth.
As well as last-minute tax planning for the tax year ending 5 April 2019 (2018/2019), now is also a good time to put in place strategies to minimise tax throughout 2019/2020. Although, while arranging your affairs to save tax is an important part of financial planning, it is not the only part. It is also essential that any tax planning strategy that is being considered also makes commercial sense. In this newsletter we cover the main planning opportunities open to UK resident individuals. All references to spouse include civil partners and all references to married couples include registered civil partners.

The following are the main income tax factors that are relevant for 2018/2019:
  1. The personal allowance is £11,850. This is expected to increase to £12,500 for 2019/2020. Since 6 April 2015 it has been possible for one spouse to transfer 10% of their personal allowance to the other spouse provided neither spouse is a higher or additional rate taxpayer.
  2. The threshold for the start of higher rate tax on taxable income (outside of Scotland) is £34,500 in 2018/2019. This is expected to increase to £37,500 for 2019/2020.
  3. A 45% tax rate applies to taxable income that exceeds £150,000.
  4. People with income in excess of £100,000 lose some, or all, of their standard personal allowance.
  5. A 0% starting rate tax band of £5,000 for savings income, other than dividends (eg bank and building society interest). This tax band is only fully available where earned income (eg salary, benefits in kind, pensions, etc.) does not exceed the personal allowance, and it reduces to the extent that earned income does exceed the personal allowance. So, for example, if earned income is £12,350, the 0% starting rate for savings income reduces from £5,000 to £4,500. Also, this 0% tax band is not a true exemption as it uses up part of the basic rate tax band.
  6. A £2,000, a year, 0% tax band also applies to dividend income. Above this 0% tax band dividends are taxed at:
  • 7.5% for basic rate taxpayers;
  • 32.5% for higher rate taxpayers; and
  • 38.1% for additional rate taxpayers.

Shareholding directors who draw remuneration from their company in the form of dividends will need to base any tax planning on the above dividend allowance and tax rates. Investors who receive more than £2,000 a year in dividends from investments may also need to review their investment strategies.
  1. The personal savings allowance means that savings income of up to £1,000 a year (basic rate taxpayer) and £500 a year (higher rate taxpayer) is tax free.
The 2019/2020 increases in the personal allowance and basic rate tax threshold will mean that the number of people who pay higher rate tax is reduced. The impact of the thresholds at (iii) and (iv) above continuing to remain frozen at their original levels, is that the number of people with income of more than £100,000 and £150,000 will increase. As a result, more people will be required to pay rates of income tax of up to 60% on some of that income.
  • Tax increases can be combatted in a number of ways including:
  • Maximising the use of all of a couple’s allowances, reliefs and exemptions.
  • Planning to use the allowances on savings income.
  • Planning around dividend taxation.
  • Using tax-efficient investments.

We will now consider these in more detail.