New tax planning strategies for 2007
MoneyWise Spring 2007
Every year thousands of taxpayers pay much more tax than necessary because they fail to use straightforward tax planning strategies and claim tax reliefs they are due, according to the website www.unbiased.co.uk. Here are some of the areas you should consider before the 2006/07 tax year comes to an end at midnight on Thursday 5 April.
Remember that tax rules can and do change and you need to plan in the light of your own individual circumstances. Tax is important but not the sole issue. For example, investing in a pension will restrict access to your savings. The Financial Services Authority does not regulate taxation and trust advice.
Pension contributions
Pensions offer potentially valuable tax saving opportunities – especially since the rules on pension contributions changed radically from 6 April 2006:
• Broadly speaking, you can now personally contribute up to 100% of your earnings to pension arrangements with full tax relief, provided that total contributions to your pension do not exceed £215,000 in this tax year.
• Gone is the old rule which meant you could not contribute to a personal pension if you were a member of your employer’s pension scheme and earned more than £30,000 a year. Now, if you wish, you could use othe types of personal pension to top up your retirement benefits.
• Whatever pension arrangement you choose, the mix between pension income and tax-free cash will be the same, unless you are subject to special transitional rules. So, normally 25% of your pension fund will be available as a tax-free lump sum when you draw your benefits.
• If you want the tax saving in the current tax year, you must make the contribution before 6 April 2007.
If you have no earnings, you can still contribute up to £3,600 (gross) to a personal pension in 2006/07. You could also make contributions of up to £3,600 on behalf of your children, grandchildren or partner. All contributions are made net of basic rate tax, so the net contribution is £2,808, even for a non-taxpayer.
Inheritance tax
Inheritance tax (IHT) has been in the headlines in the last year. As the tax year end approaches, you should review:
• How you use your annual exemptions, the most important usually being the £3,000 annual exemption. You can only carry this forward to the following tax year and then it can only be used once that year’s exemption has been exhausted. So if you and your partner have made no gifts since 5 April 2005, you can now give away £12,000 free of IHT.
• Whether to make large lifetime gifts now. The last Budget reduced the opportunity to make lifetime gifts with no immediate charge to IHT. The chance to avoid IHT on large gifts could disappear completely in the next Budget.
Capital gains tax
This tax year you can make up to £8,800 of capital gains without having to pay any tax. You could use the 2006/07 annual exemption to take some tax-free profits after a relatively good year on most of the world stockmarkets. If you do not use your exemption, it cannot be carried forward.
