By David Watkinson www.watkinsonblack.co.uk
As things go around, so things come around. The previous tax year has finished, but the new one has started with the various fresh opportunities that are presented.
Firstly, you have the opportunity to invest in a new ISA. If you missed the opportunity to use your 2014-15 allowance then stop fretting and ensure that you make full use of this year’s increased allowance of £15,240. And remember that the old distinction between cash ISAs and share ISAs has now been scrapped, and you can now invest the full amount in a bank or building society account if you so wish.
Secondly, if you are in a marriage or a civil partnership and either you or your partner does not earn enough to use their full personal allowance of £10,600 then that person can transfer up to 10% of their allowance to their partner, subject only to the other partner not being subject to higher rate tax. The election has to be made on-line and means that there is a potential tax saving of £212 in the current tax year.
And there is always the tax saving possibilities of investing money into a pension. Under certain circumstances that can be particularly attractive. For instance, if you have taxable earnings above £100,000 then as well as paying tax at 40% your personal allowance is reduced by £1 for every £2 by which your taxable income exceeds £100,000. This results in an effective marginal tax rate of 60%. However, taxable earnings are calculated after deducting pension contributions. Therefore, if your taxable income is £10,500 then you can pay £400 net, equivalent to £500 gross, into a personal pension and save tax of £200.
A similar tax savings opportunity now presents itself to a couple where one partner has earnings below about £9,500 and the other has earnings just above the basic rate tax band. Higher rate tax becomes payable at £42,465. If, therefore, the higher earning partner has income of £42,965 then they can pay that same £400 net, £500 gross, into a pension and obtain further higher rate tax relief of £100, reducing the net cost to £300. Moreover, this will then reduce taxable income to a level at which only basic rate tax is payable, meaning that the lower earnings partner can now transfer the unused allowance of £1,060 to the higher earner, resulting in a further tax saving of £212. Therefore, the total gross pension contribution of £500 will be achieved at a cost of only £88 after tax relief! How is that for a good investment?
WatkinsonBlack are pleased to provide advice on these as well as other matters, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us.
Please note that these ideas are intended to inform rather than to provide advice and you should always obtain professional advice before taking any action.
