Category Archives for Tax

How to Make Tax Less Taxing

Last year, the most popular time to submit personal tax returns online was between 4pm and 5pm on 31 January, just hours away from the deadline. During this period, the Inland Revenue received 17 submissions every second. Not everyone made it in time, though. Excuses included: “My mother-in-law is a witch and put a curse on me” and “I’m too short to reach the postbox.”

January might seem ages away, but now is the best time to make a start on your tax return. Although it’s customary to leave self-assessment to the last minute, you can save yourself some stress (and maybe even a few quid) by getting going right away.

In this post, I’ll explain three tactics for making the self-assessment process less taxing.

1. Calculate your tax liability now and start saving

Even if you don’t want to actually submit your tax return now, it’s worth at least working out how much you owe. Having a rough idea of the amount allows you to start putting aside money. If the total comes to £3,000, you can save £300 each month between now and January, rather than having to find a big chunk of money immediately after Christmas. The longer you leave it, the bigger the amount you need to find in one go.

2. Get organised with your paperwork

Completing the form is much more straightforward if you can easily access all the necessary information. Make sure you save:

  • Payslips
  • P60
  • Dividend vouchers
  • Records of any other income
  • Running total of turnover and overheads for sole traders

If you’re hopeless with paperwork, scan everything and keep it in Dropbox or Evernote. Your future self will be delighted you made the effort.

Software such as TaxCalc stores all your standard details and automatically transfers them to your latest tax return each year. It also includes a What If? feature so you can see the tax implications of different scenarios.

Screenshot of TaxCalc

A screenshot of TaxCalc

3. Pay Your Tax Monthly

It might seem perverse to pay your tax earlier than strictly necessary. However, this can make your finances more manageable. You won’t get any benefit from holding onto your money if you need to dip into your overdraft to cover the bill in January.

If you’re self-employed, you can use HMRC’s ready reckoner to calculate your likely tax bill and then create a budget payment plan. You decide how much you want to pay each month (or week). You still need to pay any tax outstanding by the deadline of 31st January.

Conclusion

In 2018, almost 750,000 people submitted their tax returns late, incurring penalties and interest:

  • 1 day late – £100
  • Up to 3 months late – £10 for each additional day (capped at 90 days) in addition to the initial £100 fine (up to a maximum of £1,000)
  • 6 months late – either £300 or 5% of the tax due (whichever is higher) in addition to the penalties above
  • 12 months – an additional £300, or 5% of the tax due, in addition to the above penalties. In some cases, you could be fined 100% of the tax due, thereby doubling your bill.

By getting ahead of yourself, you can have a much happier and wealthier New Year.

Image © Brian Jackson – stock.adobe.com

How to Make the Most of the New Tax Year

Unlike me, you’re probably not excited by the new tax year. However, this is a great opportunity to reassess your financial situation and then reward yourself with chocolate. Every April 6th, your tax allowances are adjusted and maximum contributions reset.

In this post, I’ll explain what’s happening this year with tax allowances, pensions, and ISAs.

ISAs

The overall maximum ISA contribution remains unchanged at £20,000. So, you can save or invest up to this amount across cash, stocks & shares, and Innovative Finance ISAs.

If you’re still under 40, you can use part of your allowance for a Lifetime ISA (LISA).  This helps you either buy your first home or put aside money for retirement. Save the maximum of £4,000 this year and the Government tops it up to £5,000.

Those of you who are even younger (0-18) can pop £4,620 into a Junior ISA.

You can’t carry forward any unused ISA allowances to future years, so work out a plan now if you want to maximise the tax advantages before 5th April 2020.

Pensions

Unlike ISAs, you’re allowed to carry forward unused pension allowances for up to 3 years. Usually, you can contribute up to £40,000 or the value of your salary (whichever is lower) to your pension pot each year. You then receive tax relief on that amount. If you’re a basic-rate taxpayer, a £3,000 contribution becomes £3,600. The Government essentially refunds the tax you’ve paid on that income. Higher- and additional-rate taxpayers get relief at 40% and 45% respectively, although you often need to reclaim this through your self-assessment return.

If you’re an employee who’s likely to move into a higher tax bracket next year, it could be worth deferring your pension contributions to ensure you benefit from the extra relief. For more information on carrying forward your pension allowance, take a look at the Pensions Advisory Service guide.

Anyone who’s self-employed through a limited company can normally make unlimited pension contributions from the business, regardless of how much you pay yourself as a salary. You mustn’t, however, exceed your turnover from the year. Although you don’t get tax relief, it’s tax deductible. Corporation tax isn’t payable on the amount you put in your pension.

Even if you’re not currently earning, you can still contribute £2,880 into a pension. Tax relief then brings this amount up to £3,600.

Tax Changes for 2019-20

If you’re wondering how to find some spare cash to invest in your ISA or pension, you might have a pleasant surprise. In the year 2019-20, the personal allowance – the amount you can earn tax-free – rises from £11,850 to £12,500. The higher rate threshold above which you pay 40% is also increasing to £50,000. Some workers could see an extra £500 in their bank account over the year.

The National Insurance (NI) threshold has nudged up, too. You can now earn £8,632 (up from £8,424) before you need to make NI contributions of 12%. Once you earn more than £50,000, you pay 2% above that amount. This threshold has risen from £46,500, so anyone earning a salary between those two amounts will see a larger NI deduction from their pay packet.

Try the Which? tax calculator to see how much you should be paying. Calculators are available for previous years, too, to help you make a comparison. Which? also offers a comprehensive guide on all the personal tax rates for 2019-20.

Conclusion

Depending on your salary, then, you might have some extra money this year.  Have a think about whether you can make it work harder for you by using some of the ISA and pension tax incentives outlined above. Even if you invested just £25 each month, this could grow to £3,600 over 10 years1 Don’t forget to pay yourself first.

This post is for information only and does not constitute financial advice.

Image © Adrian – stock.adobe.com

  1. Based on a stocks & shares ISA with a return of 5%. This calculation includes annual charges of 1.25% but does not take account of inflation. []

Will inheritance tax affect me?

Inheritance tax used to be something that concerned only wealthy people. Now that even modest homes can be worth seven-figure sums, more people are starting to pay attention. Although less than 4% of estates1 are liable for this tax, this figure is increasing. Perhaps unsurprisingly, half of all inheritance tax is paid on estates in London and the South East. Is this something you need to consider when making your long-term financial plans?

In this post, I’ll explain how Inheritance Tax works, what it means for your property, and a few ways you can reduce your liability.

What is Inheritance Tax and how much does it cost?

Inheritance tax (IHT) is charged at 40% on estates over £325,000, once any debts and funeral expenses have been deducted. Your estate includes property, savings, investments, valuables such as jewellery and artworks, and payouts from life insurance policies. So, if your estate is valued at £500,000, your beneficiaries would pay 40% tax on £175,000 – that’s the amount over the threshold. The net estate, then, is worth £430,000. Any tax must be paid before assets are passed to beneficiaries.

That’s a simple example. The tax liability depends on the relationship between you and the beneficiary and the type of asset. If you’re married or in a civil partnership, your surviving spouse can inherit your estate and pay no inheritance tax on any of it, however much it is worth.

Property and Inheritance Tax

There are also special rules around residential property. If you leave your main residence (not a second home or rental property) to a direct descendant, the threshold is raised to £450,000 on the property value. For these purposes, direct descendants include children, grandchildren, step-children, adopted or foster children. Nieces, nephews, siblings, and parents aren’t eligible. This threshold rises to £475,000 in 2019-20, and £500,000 in 2020-21. After that, it’ll increase in line with inflation. The exception is for estates in excess of £2m, where the relief tapers off.2

Currently, then, if you left a house worth £500,000 to your grandson, he’d pay no inheritance tax on the property after April 2020.

There’s another layer of complexity, albeit one that offers your beneficiaries a significant tax advantage. You can inherit your spouse’s unused IHT allowance, too. In some circumstances, this means you could leave that grandson a £1m house without him incurring any IHT. Here’s how it might work. Your spouse dies, leaving you the house. As you’re married, you don’t pay any inheritance tax. Your late spouse’s IHT allowance is therefore intact and you inherit that, too. Your combined allowance is now £1m.

It’s important to note that if you’re cohabiting, you are liable for IHT on your partner’s estate. What happens to their share of any property you own jointly depends on how you’ve arranged the deeds. Joint tenants automatically own the late partner’s share but have to pay inheritance tax if the value is more than the IHT threshold. Tenants in common, however, inherit the other half of the property only if their fellow tenant has left it to them. In these circumstances, they’re also liable for IHT on that portion. To find out more about tenancy, please take a look at the Government’s website. My post on intestacy explains the importance of wills, especially for cohabiting couples.

How to reduce the inheritance tax liability on your estate

In short, the best way to reduce your beneficiaries’ tax bill is to start giving away some money now … and make sure you live at least another seven years. Otherwise, beneficiaries are potentially liable for IHT on those gifts. Crucially, this applies only to assets – so, savings or investments such as ISAs. You can give away anything you receive through a salary or pension without creating a future liability for your beneficiary – but not so much that it adversely impacts upon your lifestyle.

At the moment, you can give away up to a total of £3,000 of assets each year without the beneficiaries incurring a future tax bill. You can carry forward your unused allowance for one year, too, meaning you have £6,000 to distribute. Alternatively, or additionally, you can give a maximum of £250 to as many people as you like – so this might be a good choice if you have a lot of grandchildren or nieces and nephews.

There’s also a special allowance for wedding and civil partnership gifts. You can give your £5,000 to your children, £2,500 to grandchildren, and £1,000 to anybody else.

Here are a few more options for reducing inheritance tax:

Leave money to charity – bequeath at least 10% of your estate to charity and the rate of IHT on the remainder is reduced from 40% to 36%. The charity pays no tax, regardless of how much you leave them.

Bequeath everything to your spouse – assuming you’re married or in a civil partnership, your spouse inherits it all tax-free.

Use equity release – this could free up some of the value of your house and give you an income. This is a big decision, though, and it’s certainly not right for everyone.

Draw up a trust – although this could protect your estate from some IHT, trusts are expensive and complex. They are usually only worthwhile for very large estates. Contact STEP to find a suitably qualified professional.

Conclusion

Inheritance tax is a complicated area, but it’s one that is of increasing importance to many of us. It’s worth taking the time to understand if and how it affects you, especially if you’re cohabiting. The rules will undoubtedly change over the next few decades, too, so do keep an eye on what’s happening. Governments keen to pop the housing bubble are likely to reduce the main residence allowance, bringing many more estates into the IHT band.

Visit MoneySavingExpert for some more information and examples of how IHT might affect you. There’s more advice and a useful calculator on the Which? website.

And please don’t forget to make a will.

This post is for information only and does not constitute financial advice.

  1. Source: Office for Budget Responsibility. []
  2. I’m assuming anyone in this position has their own financial adviser, so I won’t go into the details here. []