We can make a long list of taxes that we may pay – income tax, national insurance, VAT, capital gains tax and inheritance tax to name a few.
However each year individuals are given the opportunity to recover a portion of the tax paid or shelter their hard-earned savings from the taxman. But you need to act before April 5.
Tax allowances run from April 6 one year to April 5 the following year and individuals are able to shelter funds under the headings of income tax, capital gains tax and inheritance tax.
In respect of investments be sure to consider utilising your Individual Savings Account (ISA) allowance of £10,680 per year. This can be invested in full within a stocks and shares ISA or split £5,340 in a stocks and shares ISA and £5,340 in a cash ISA. Considering the abysmal interest rates for deposits on cash and that interest for a basic rate taxpayer is being taxed at 20 per cent, the importance of sheltering cash within an ISA allowance is an absolute priority.
Residual cash should be in the first instance in the name of a non-taxpayer potentially saving £1,495 in income tax. The mad panic for utilising the ISA seems to be end of March, beginning of April. Consider utilising your allowance as soon after the start of the tax.
The annual gift allowance of £3,000 can be used to reduce one’s estate immediately and so cut down your in heritance tax liability. If you haven’t used the previous year’s allowance, you are able to pay £6,000 in the current tax year.
In respect of capital gains tax, each individual has an annual allowance of £10,600. Therefore gains on sale of assets, for example shares, will not attract capital gains tax of 18 per cent or 28 per cent provided the gain is less than £10,600. If the gain is perceived to be in excess of this you may wish to consider deferring part of the sale to the tax year 2012-13 at which time you will have a new CGT allowance.
In respect of pensions there are a number of issues to consider prior to the end of the tax year, not only to utilise allowances but to adhere to new pension legislation that was introduced in April 2011.
For individuals with earnings in excess of £42,475 this income will be taxed at 40 per cent. Consider making a pension contribution prior to April to benefit from 40 per cent tax relief.
For example a contribution of £10,000 has a net cost of £6,000 and also the added benefit of growing in a tax-free environment.
Just one small point, don’t wrongly assume that your pension automatically receives 40 per cent tax relief if you pay 40 per cent income tax. Basic rate relief is given at source and higher rate relief through self-assessment.
