Back to the future

The best way to avoid end-of-year panic is to think about reverse planning.

Planning your tax year in reverse sounds like a strange idea, but that’s exactly what I advise my clients to do if they want to avoid unnecessary stress. Very often, they’re trying to do things at the last minute, when they really should have thought about them a lot earlier e.g. making best use of tax allowances, reliefs and exemptions. 

Take married couples, for example. On 6th April, new rules came into force that allow one spouse or civil partner to transfer 10% of their personal allowance to their other half, providing that neither of them pays tax above the basic rate. It’s a good opportunity in a situation where one partner has a low income and would otherwise have wasted their allowances. It does involve contacting HMRC immediately though and asking for the allowance to be transferred and tax codes to be updated.

And what about the child benefit charge? When one member of the family has an ‘adjusted net income’ of £50,000 or more, the benefit starts to reduce. And once the income exceeds £60,000, you lose it altogether. That could mean a gap of up to £1,800 a year if you have two kids. But if you think ahead and plan, the limits can be extended – through personal pension contributions, for instance, or gift-aid donations.

There’s another planning opportunity worth mentioning too. In April, the starting-rate tax band increased to £5,000 and the rate went down to zero. If you are a married couple or civil partners and you have relatively low pensions or earnings, but a higher amount of investment income, you need to consider your options. You could for example receive pensions to the value of around £10,600 and another £5,000 in gross interest without paying tax.

If you talk to your accountant at the earliest possible stage, you’re always better prepared to take advantage of opportunities. So don’t end up with a last-minute scramble. 

When you're saving, look for extra savings

Whether we’re young or old, the government is keen to encourage us to save. Interest rates, however, are at a record low, so it’s important to look for every possible advantage or tax break you can find. We explore the potential of the new savings allowance.

Many people know about the NISAs or new ‘super’ ISAs that have been introduced, which should allow people to save up to £15,240 a year tax free in 2015-16. Savings allowances tend to receive rather less coverage in the press and on the TV and radio, however. While it’s true to say that the amounts involved are relatively small, they’re certainly not insignificant. Particularly if you’re someone who is on a modest income.

Up until the end of the 2014-15 tax year, some people with savings income of up to £2,790 would have it taxed at 10% rather than 20%. In a bid to boost savings, the government has pledged a £5,000 gross savings allowance for people with an income of up to £15,600 (the combined total coming from the savings and the personal allowance of £10,600).

To put this in tangible terms, this takes you from a maximum saving of £279 in the last tax year, to a £1,000 in the year head. Certainly not be sniffed at.

If you’re someone with earnings of, say, £12k, all your savings could be taxed at zero per cent, provided the combination of your salary and/or pension and your savings is under the £15,600 limit. On the other hand, someone who earns more than £15,600 can’t benefit at all.

In a scenario in which you have a £14k income, but your savings take you above the threshold to perhaps £18k, it’s possible to claim a tax rebate on the sum between £14,000 and £15,600, but this has to wait until your self-assessment tax return, or form R40. If you fall neatly under the cap, however, you can register to receive interest paid gross.

All in all, it’s important to make the most of the allowances that are available and maximise the amount that’s due to you. If you’re trying to make a retirement income stretch further, for instance, it’s vital to keep up to date with the changes that are taking place. They’re definitely to your advantage.

Self Assessment: don’t leave it all to the wire

If you’re relying on your accountant to help you with your self-assessment tax returns, the earlier you’re able to get organised the better.

As accountants, we always like to be proactive and remind clients of the need to get their records, receipts and other relevant information ready as far as possible in advance of their filing deadlines. Inevitably though, pressures of business and life can get in the way and the records only arrive as January 31st looms.

 

Of course, any professional accountancy firm will do their best to turn things around speedily, but it’s not an ideal scenario from anyone’s point of view for things to be done last minute. At that point, for some clients, will come the realisation that cashflow isn’t good enough to cope with the imminent tax demand and there is no time left to budget for the liability. 

 

If you’re able to get ahead of the game, you’ll not only avoid last-minute panics and the danger of possible surcharges and interest for late payment of tax, but you may well have the opportunity to spend some time discussing tax planning options with your accountant too.

 

Another issue is that a last-minute rush may mean your accountant can’t always plan resources effectively. If your tax affairs aren’t that complex, it might be that a relatively junior member of staff can happily take on the work but if they’re already allocated to other projects, a more senior accountant may be needed. Many firms like DNG will do their best to avoid penalising clients financially and even discount senior rates but you want to be certain about the fee level you’re going to pay and help yourself avoid any nasty surprises.

 

So the message is to think ahead and give your accountant a call. See if you can get your adviser the information they need early enough to recalculate any payment on account you have to make in the summer. It may well be that reducing your July payment is worth considering, especially if your income is down on the previous year and accounts have been prepared early which confirm this. For employees who file self-assessment returns, your reminder to take action could be as soon as you have received your P60. 

 

We can then consider the tax that will be due the following January and you can start to budget based on your cash-flow projections. It’s a common sense approach, which will allow both you and your accountant to sleep that little bit easier each New Year.