8 new tax year resolutions to help you be more efficient in 2017/18
Current Issues | Personal tax | 29th March 2017
April 6th sees the transition from one UK tax year to the next, however it rarely registers on people’s radars. Recent changes to certain tax rates and allowances mean some people are facing a higher tax bill. These changes include the tax rate increase on dividends and changing allowances for those with property rental income.
Now is the perfect time to start getting your tax affairs in order. Ensuring you are managing your tax affairs more effectively over the coming year will help you to budget for your tax payment in 2018 and may even help you to avoid paying more tax than you need to.
So here are eight new tax year resolutions to help you prepare:
1. Double-check your Pay As You Earn (PAYE) coding
Following on from your 31st January 2017 self-assessment return you should receive a PAYE coding notification from HMRC. Don’t assume this coding is correct and do double-check it. Although PAYE codes do not affect your total tax payable, incorrect codes can have significant consequences on how tax is deducted from your pay and potentially result in unexpected tax bills in January each year. Particular things to look out for are the potential abatement of your personal allowance and relief for pension contributions. By double-checking your PAYE coding when you receive it, you can tackle any errors on HMRC’s part and avoid underpaying or overpaying tax.
2. Review your income against current tax threshold brackets
If your income is likely to rise, be mindful of the income tax bands and the taxable rates effective at certain income levels. For those with £100-122k of income, the resulting withdrawal of the nil rate personal tax allowance plus a tax rate of 40% means you effectively pay a 60% tax rate. If you are likely to move into a £100k+ salary this year, consider if you can make greater contributions to a salary sacrifice pension scheme or other salary sacrifice initiatives offered by your employer.
3. Get your 2016/7 tax return done now
Whilst the deadline for paying the tax due from your 2016/17 self-assessment return is 31 January 2018, you can submit the return any time from 6 April 2017. By completing the return sooner rather than later, you can identify what tax is due and budget accordingly. Do remember that this will be the return where people feel the effects of the increase tax on dividends, the loss of the wear and tear allowance for property rental income and other recent changes.
4. Review your child benefit claims
If you earn over £50k, HMRC will start to take back some of any child benefit you receive. At £60k they take all of it back via your self-assessment return calculation. Child benefit is always based on the higher earner’s salary in a couple. So if one of you is likely to exceed the £50k income threshold this year, you might want to review whether to continue to claim child benefit. Or you might want to essentially treat the child benefit as an interest free loan, knowing that come 31 January 2018 you will have to pay some or all of it back, and plan accordingly.
5. Review your designated main residence if you own multiple properties
If you own, and use as a home, multiple properties you may want to review which property is designated as your main residence for tax purposes. Your main residence is exempted from capital gains tax for the period(s) you live in it. Also exempted are the final 18 months of ownership, regardless of whether you were living it in at that point. You are permitted to elect for a second home to be treated as if it were your main home and thereby exempt some of the period of ownership from capital gains tax, including the final 18 months this could help you be more tax efficient across your property portfolio in the coming year.
6. Make the most of current pension contribution tax-free levels
Over the past years, there have been many changes to the tax reliefs on pension contributions and this looks likely to continue. It therefore may make sense to make the most of the current pension contribution limits if they fit your needs before things change again.
7. Don’t forget to use the gifts out of excess income relief when it comes to inheritance tax
Did you know you can give regular gifts Inheritance Tax (IHT) free from your excess income? This relief doesn’t require you to live 7 years after making the gift to escape IHT and there is no upper limit. The gift does have to be made regularly to qualify (for example, monthly or quarterly) and you will have to be able to prove that it is coming out of your excess income (there are steps we can take to demonstrate this). The allowance has the potential to save the 40% IHT on the sums moved out of your estate. You can adjust the levels you regularly give and can stop the gifts when you want. You cannot use this relief to make one-off or erratic gifts.
8. Make the most of legacies to charities to ease your inheritance tax (IHT) liability
Another IHT consideration to bear in mind is that if you leave 10% of your chargeable estate (ie the amount exceeding the nil rate band) to charity this can bring your IHT liability down from 40% to 36%. In their wills, many people like to leave fixed amounts to specific charities – such as £500 or £1000 etc. Consider reviewing the level of the charitable legacies you are leaving in percentage terms, as if they are approaching 10%, it might be a case of giving extra to charity to save a greater sum in tax.
Whilst it’s tempting to let the start of the new tax year come and go, this year it is a good reason to review your tax affairs and ensure that you are prepared for potential tax payment increases in the year ahead. Forewarned is forearmed and so use the time available to utilise all the tax allowances currently available to you. Also budget for a potentially higher tax bill in January if you are likely to be affected by the dividend tax and changes to the property rental regime.
If in doubt do consult an expert. As Britain prepares for Brexit, events such as the Chancellor’s Budget will continue to make further changes to the tax system and it can be hard to keep up with your latest tax obligations and opportunities.