3 top tips for tax year end – a brief checklist for advisers
AJ Bell’s Tom Selby offers three tax tips for advisers in the run up to the tax year end
The end of the financial year provides a good opportunity for advisers and clients to take stock of the last 12 months; sweep up any unused tax allowances; and consider how any upcoming rule changes could affect future retirement planning decisions.
This April is no exception, with an overhaul of the Scottish income tax system and an incoming cut to the dividend allowance likely to be the focus for many advisers.
While delivering an exhaustive list of things to consider during the maelstrom of tax year-end would be an impossible task, here are a few things to consider:
1. Scottish income tax overhaul
If you have clients who are Scottish taxpayers, big changes are just around the corner. For the 2018/19 tax year people living and working north of the border could be subject to a different rate of income tax to their counterparts in the rest of the UK.
Two new tax bands (‘starter rate’ and ‘intermediate rate’) will be established, while the higher and additional income tax rates will also be increased (see table for details).
The move will have a knock-on impact on pension savers in Scotland who currently receive pension tax relief at their marginal rate. HMRC has recently confirmed details of how this will work in practice.
Members of schemes which apply tax relief after they have paid income tax will be affected in different ways.
Savers will still receive tax relief automatically at the basic rate of 20%, meaning those falling into the starter rate (£11,850 – £13,850) and basic rate (£13,850 – £24,000) bands won’t have to do anything in order to receive the tax relief they are due.
However, anyone who falls into the new 21% intermediate band (£24,000 – £43,430) will need to tell HMRC via self-assessment in order to get the extra 1% of tax relief they are entitled to. While these are unlikely to be core adviser clients, it is important to ensure anyone who is pulled into this new tax band claims the tax relief they are entitled to.
Higher and additional-rate taxpayers will continue to apply for tax relief through self-assessment, as they do at the moment. Clients in these tax brackets will have an extra reason to funnel their salary into a pension as they get an additional 1% in tax relief under the new framework.
Members of net pay schemes – where pension contributions are deducted before income tax is applied to their pay – will not be affected by the changes.
2. Beware the dividend allowance tax trap
The amount of dividend income clients can receive tax-free will be slashed from £5,000 to £2,000 in the 2018/19 tax year. Any dividend income received above this amount will be taxed at 7.5% (basic-rate taxpayer), 32.5% (higher-rate taxpayer) or 38.1% (additional-rate taxpayer).
In pounds and pence, someone who receives £5,000 in dividends would previously have paid no tax but from April they will be hit with a tax bill of £225 if they are a basic-rate taxpayer. Higher-rate taxpayers, meanwhile, will pay £975 more in tax and additional-rate taxpayers a whopping £1,143.
Directors (this could include advisers themselves as well as clients) should consider bringing forward their dividend payments to before 6 April 2018 to minimise their tax bills. Client portfolio reviews should also look to root out any dividend-paying investments held outside tax wrappers and consider shifting them into an ISA or SIPP.
3. Use carry forward to benefit from a £160,000 annual allowance
While the amount people can save tax-free in a pension has been pared back by successive Chancellors from £255,000 in 2010 to £40,000 today, savers who use ‘carry forward’ rules can potentially boost their annual allowance to £160,000.
Carry forward allows you to utilise any unused annual allowance from the three previous tax years in the current tax year. So for 2017/18 you can top-up your pension with unused allowances from the 2014/15, 2015/16 and 2016/17 tax years.
April 5 therefore represents the last opportunity for clients to utilise any unused allowance from 2014/15.