The current personal allowances for 2012-13 are:
Basic personal allowance £8,105
Age 65-74 – £10,500
Age 75+ - £10,660
Tax rates for 2012-13 are as follows:
? Savings rates 10% :£0- £2,710
? Basic rate 20%: £0 - £34,370
? Higher rate 40%: £34,371 - £150,000
? Additional rate: 50% over £150,000
Strategy 1 – if married or civil partnership
If you have a lower taxed or earnings spouse then consider transferring income-producing assets to them. You could save your personal allowance and use theirs more effectively.
The transfer must be outright and unconditional, and there is no CGT or IHT if UK domiciled and living together. If a 40% taxpayer and you transfer the income producing asset to a non taxpaying spouse you save 40% on interest income and 22.5% on dividend income.
Strategy 2 – if you have investments
Redistribute investment capital so that you can reinvest in tax free investments, or reinvest in tax efficient investments that produce no income – such as unit trusts and Oeics for growth, or investment bonds. Either try to produce less taxable income or invest for growth.
Strategy 3 – reduce your taxable income through pension contributions
Making a pension contribution (you can make gross contributions of up to £50,000 per annum unless you use carry forward of unused allowances from the past three years, where the total contribution in the current year could be up to £200,000) can save your personal allowance and give you tax back.
The following example shows how this works.
Assume taxable earnings of £120,000 p.a. Male age under 65.
What are the savings in terms of Tax should you make a lump sum Pension Contribution ?
Lump sum contribution of£21,000 gross, net £16,800
Brings taxable earnings to £99,000
Saves personal allowance of £8,105 (so tax saved on this at £3,242 at 40%, but increased to £4,863 as actually saves 60% which is the effective tax rate between £100,000 and £114,950).
HMRC also pays back 20% x £21,000 = £4,200 as you are a 40% taxpayer making a pension contribution. In addition, HMRC uplifts your net contribution of £16,800 by £4,200, so that the gross contribution is £21,000.
Total savings in tax: £4,863 + 4,200 = £9,063 for a net pension contribution of £16,800.
This strategy has saved your personal allowance and reduced your tax payable.
Strategy 4 – make charitable donations
Similar to pension contributions above, making charitable donations (gift aid payments) is currently unlimited (although there are steps being made by Government to cap this).
Charitable donations reduce net adjusted income, therefore allowing you to save your personal allowance if reducing taxable income to below £100,000. Tax relief is claimed by the charity – the payment is treated as being paid ‘net’. A higher rate taxpayer may claim additional relief against income tax or capital gains tax (the income tax claim is for the difference between the higher rate and basic rate (40-20=20%) on the total value of the donation. If you donate £100, the total gift to the charity is £125 as a gross donation. You get tax relief back of 20% x £125 = £25.
Some additional tax tips are that (i) you can elect for the donation to apply to the previous tax year (ii) you can gift shares, securities, land, buildings- these all reduce your taxable income.