Tax Breaks: Use Them, Don’t Lose Them!

Lindsey Wicks looks at various annual limits that taxpayers might want to use before the end of the tax year.

There are a range of tax-advantaged investments with annual allowances that taxpayers might consider, although appropriate financial advice should always be sought in advance of making any investment. 

The general ISA subscription limit is £20,000 for 2017/18. I discussed the various types of ISA available in the December 2017 edition of Tax Insider. It’s worth noting that for the 2017/18 tax year only, funds held in a help to buy ISA at 5 April 2017 can be transferred to a lifetime ISA without counting towards the 2017/18 lifetime ISA subscription limit, so the 25% bonus potentially applies to the combined balance. Time is running out to decide whether such a transfer is worthwhile.

To encourage individuals to invest in certain companies, there are various reliefs with annual investment limits for venture capital investments. HMRC has a webpage that provides an overview of the investment limits and income tax relief that apply, together with details of the capital gains tax reliefs available on investment and/or sale (www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors). 

Particular types of employee share scheme are tax-advantaged. Company share option plans (CSOPs) are subject to an overall investment limit of £30,000 and enterprise management incentives (EMI) have a maximum value of options that can be granted over a three-year period of £250,000. Share incentive plans (SIPs) have annual limits and save as you earn (SAYE) schemes have monthly investment limits. The government has a webpage providing a summary of the various schemes (www.gov.uk/tax-employee-share-schemes). 

Individuals can save up to 100% of their earned income, or £3,600 if higher, per annum into a pension. However, there are other limits to be mindful of when making pension savings, such as the annual allowance limit of £40,000 (tapering down to £10,000 for those with income over £150,000) and the lifetime allowance of £1 million. As highlighted in the November 2017 edition of Tax Insider, those subject to the high-income child benefit charge may be able to achieve low-cost pension saving given the high marginal tax rate that they would otherwise suffer.

Allowances aren’t always automatic, so it’s worth checking whether a claim is required. Here are some examples.

For those on lower incomes, checking eligibility for the marriage allowance is advisable, particularly as claims can currently be backdated to include eligible tax years from 2015/16 onwards. A claim can be made by an individual to transfer 10% of their personal allowance to their spouse or civil partner if the following four tests are met:

For taxpayers with property or trading income below £1,000, these allowances apply automatically, removing the requirement to declare low levels of income from 2017/18 onwards. There are several points to be aware of, though. 

The first is that the allowance is measured against gross income rather than profits after deducting allowable expenditure, so if gross income exceeds £1,000, the allowance is not automatic. Second, where gross income exceeds £1,000, it may be more beneficial to elect to deduct the £1,000 allowance rather than actual expenditure. Third, where there is a loss, taxpayers may want to elect to disapply the allowance in order to claim loss relief. Elections must be made on or before the first anniversary of the normal self-assessment filing deadline for the tax year.

Example – Trading Income over £1,000

Anna has gross trading income of £1,200 before deducting allowable expenditure of £300. As her gross income exceeds £1,000, Anna does not qualify for the full trading allowance and she must declare her trading income. 

However, rather than being subject to tax on profits of £900, she may elect to deduct the £1,000 allowance instead of her actual expenses, reducing her taxable profits to £200. 

For those looking to dispose of chargeable assets, the capital gains tax annual exempt amount (£11,300 for 2017/18) should not be forgotten. Where several disposals are contemplated, it might be possible to manage the timing of disposals to fall within different tax years to benefit from more than one annual exempt amount, although the risk of price fluctuations must be considered. 

Making small gifts for inheritance tax purposes should not be overlooked. There is the annual exemption of £3,000, with the ability to carry forward any unused exemption for one year. There is also the small gifts exemption where outright gifts to any one person are exempt up to £250 annually. Where gifts are of chargeable assets, planning to use these inheritance tax exemptions together with the capital gains tax annual exempt amount could give rise to a tax-free gift with an uplifted base cost.

Don’t overlook the simple things such as confirming eligibility for reliefs and time limits for making claims.