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The Low Incomes Tax reform Group (LITRG) provides some timely tax points and tax saving tips with the tax year end of 5 April fast approaching.

Introduction

Spring is traditionally a time for cleaning in readiness for the brighter days to come.  It is also a time to consider things you might need to do before the new tax year begins on 6 April.

This article therefore identifies some tax and tax credits issues which might need tidying up.

Following on from our February article February - not such a quiet month?, we are now approaching the end of the 2008/09 tax year.  March presents taxpayers and tax credits claimants with a number of things to think about, perhaps some more obvious than others. 

The article is split into two sections: first, some tax saving tips; second, some points to check to make sure you are keeping on the right side of the tax man and claiming your entitlements. 

Tax saving points

Savings – make sure you’re not paying too much tax

When deciding what to do with your savings, it is important to take financial advice (Getting advice on your savings and investments).  But here are some ideas to maximise the tax-efficiency of your savings:

Individual Savings Accounts

For those who have built up some savings, time is running out to use this tax year’s Individual Savings Account (ISA) limit.  For example, pensioners who have built up savings might be paying tax on the interest at 20% (or 10% if your income falls within the savings band.  By putting cash into an ISA, you can earn interest tax-free.  Each year, you can put £3,600 of cash into an ISA – this limit is per person, so couples can put in a total of £7,200.

In total, each person can invest £7,200 a year in ISAs, but only up to £3,600 can be held in cash.  You can also hold stocks and shares and other types of investment in ISAs.  More information is given in HMRC’s ISA Factsheet. 

Getting your interest without tax taken off

If your total income for a tax year falls within your tax allowances (i.e., you are not a taxpayer), you can register with the bank or building society to have interest paid on your account without tax taken off.  To do this, you complete form R85 (making sure you also go through the accompanying helpsheet), available from the bank or building society. 

When the new tax year begins, you should estimate your income for the year ahead as your eligibility to have interest paid without tax deducted might have changed – if your income has gone up you might need to start paying tax, or if your income has gone down, you might be eligible to no longer pay tax. 

You should note that once you have completed the R85, it remains in place indefinitely – so it is always a good idea to keep a check of your income to make sure you are paying enough tax. 

R85s can be accidentally left in place where they were used on children’s savings accounts or students' accounts and then people forget to tell the bank or building society to remove them when they start paying tax.  Another common situation for error is where a person’s spouse or partner dies and the resulting shift in their income can alter eligibility to use the R85 system. 

Making the most of your allowances

Everyone gets a personal allowance – an amount of income you can have each year before you start to pay tax.  This increases for those aged 65 or over, although this extra ‘age-related’ allowance can be withdrawn if your income is too high. 

Couples (particularly married couples and civil partners) might want to think about how to make the most of allowances.  You each get an allowance, but it is not usually transferable to the other (note, however, there are special rules for transferring blind persons' allowance and married couples' allowance). 

You can think about moving savings from one of you to the other so that the interest is paid in their name, which means it is their income for tax purposes.  You can save tax if your spouse or partner is a non-taxpayer or pays tax at a lower rate than you (for example, the 10% savings rate).  But there are other considerations before you move money to a spouse or partner – such as what happens to it if they die, what happens if you separate/divorce and so forth.  

Pensions

Saving for retirement can take a lot of thinking about.  But approaching the tax year end is a good time to consider it – especially as paying pension contributions can reduce the amount of tax you pay. 

If, for example, you are 65 or over and your age allowance is being reduced because your income is over the threshold, paying pension contributions might help.  Also, in the year you stop work and start taking your state pension, deferring claiming your state pension can reduce the amount of tax you pay on it – but there are lots of other considerations to take into account.  Read more about state pension deferral on The Pension Service website State Pension Deferral. 

Making charitable payments? Get your timing right

As with pension contributions, making donations to charity and Community Amateur Sports Clubs under the Gift Aid scheme can save you tax if you are paying at the higher rate of tax or if your age allowance is reduced because of your income level.  Mostly, any tax saving that goes with your Gift Aid payment is given in the tax year in which you made it, but if you make a payment before 31 January after the tax year end and claim on your tax return, you can have it treated as paid in the previous year. 

You might therefore want to estimate your income for the current tax year to see what rate of tax you will be paying and make Gift Aid payments now. 

But watch out – there are also pitfalls.  If you do not pay tax and make a Gift Aid donation to charity, you could be asked to pay back some tax or have your tax refund reduced.

Profits or losses on assets?  Think about Capital Gains Tax

If you own assets which have increased in value, you might be able to make use of your annual exemption for capital gains (£9,600 per person for 2008/09) before 6 April.  Have a look at our guidance for an introduction to understanding Capital Gains Tax. If you have made a loss, you might need to consider notifying HM Revenue & Customs so that you can offset it against future gains.

Inheritance tax – maximise your exemptions

Inheritance tax can be charged on your death if your ‘estate’ (basically, the assets you own when you die plus certain gifts you made in the seven years beforehand) is worth over a certain amount (£325,000 per person from 6 April 2009).  You can give away some amounts during your lifetime which can save inheritance tax when you die – find out more by reading our introduction understanding Inheritance Tax. In particular, some exemptions apply per tax year, so you might want to consider making gifts before 6 April. 

Points to check now or before 6 April

Tax on your wages or pension – make sure yours is right

Check your Coding Notices

Employees and pensioners should have received over the last few weeks ‘PAYE Notices of Coding’ (Forms P2) for each source of earnings from employment or pension income.  These tell you how your tax is to be deducted from your income for the forthcoming tax year – 2009/10, which starts on 6 April 2009. 

It is important that you check these look right and, if in doubt, contact HMRC.  If you have not received a Notice of Coding from HMRC for one of your jobs or pensions, again you should contact them and ask for one. 

We explain how to check your Notice of Coding if you are employed here - Checking your Coding and here if you are a pensioner.  

Students – working in the holidays?

As the end of the spring term approaches, students may be looking for a job over the holiday period.  If you are a student working only in holiday time and think you will earn less than your personal allowance over the whole tax year (£6,035 for 2008/09 and £6,475 for 2009/10), you can ask your employer if you can complete a form P38(S) which allows you to be paid without tax being taken off your wages.  Remember, though, that National Insurance Contributions may still be deducted depending on your weekly or monthly income. 

More about this process can be found here What should I do about Tax if I get a Holiday Job while I am a Student.

One point to remember is that if holiday work straddles the tax year end (5 April), you will be asked to sign two forms P38(S).  

Tax returns – dealing with last year’s fallout

Have you received a late-filing penalty?

We noted in our previous article February - Not Such a Quiet Month? that February tends to be the time when HMRC issue late-filing penalties for tax returns not submitted by the 31 January deadline (or 31 October if you filed on paper).  These penalty notices might still be coming through – don’t forget that you have 30 days to appeal if you think the notice is wrong or you had a reasonable excuse for not meeting the deadline. 

Have you been charged an extra 5% for late payment?

March will see the start of HMRC issuing 5% surcharge notices for 2007/08 self assessment liabilities which were not paid by 28 February.  Again, you have 30 days to appeal if you think that you should not have been charged the penalty or if you had a reasonable excuse for delayed payment. 

Still struggling to pay your 31 January tax?

If you still have not paid your tax bill from 31 January, it is best to take action as soon as possible – leaving the statements to pile up will only make matters worse.  Contact HMRC (using the contact information provided on your self assessment statements) to discuss it with them and ask if you can agree a payment arrangement.  More information on asking for time to pay is given on the TaxAid website - Can't Pay your Tax?

Has your income reduced?  Think about claiming to reduce your payments

You can make a claim to reduce self assessment payments on account at any time, but the tax year end is a good time to consider doing so.  This is because as the end of the tax year approaches, you might be able to get a better idea of how much your income will be for the tax year to 5 April 2009 – if it is less than the year to 5 April 2008 there is a good chance that you will be able to reduce your payments on account.

For 2008/09, you should already have paid the first instalment on 31 January 2009 and the next is due on 31 July 2009.  But if you can make a claim to reduce the payments now, you can ask HMRC for a refund if you paid too much in January. 

Find out more about payments on account here.

Our Feeling the Pinch? article allso gives more information on what to do if your income has reduced.   

Self-employed? Check your National Insurance Contributions

Following on from the above, if your self-employed earnings have changed, your eligibility for the Small Earnings Exception from paying Class 2 National Insurance Contributions may have changed.

Previously-granted exceptions last for three years, so if your earnings have gone up and you are no longer entitled to the exception, you should contact HMRC and start paying weekly class 2.  If your earnings have gone down, you may now be able to apply for exception. 

Read more about how the exception works here ( Do I have to Pay NIC? ).  The threshold for the exception for 2009/10 is £5,075. 

Is your employer helping with childcare costs? It might be time for a review 

As we approach a new tax year, it is worth considering the benefits you are getting from your employer and whether you should continue with previous options you have taken up, such as childcare vouchers.  If your income has changed, your overall tax, national insurance and tax credits position on taking vouchers may have altered. 

Have a look at our latest article Childcare Vouchers Tax Credits Claimants and the Recession for further information.

Struggling with your Council tax? Help could be available

Assessments for council tax for the forthcoming year will also be coming out about now.  People on low incomes who are struggling with bills in the current economic climate should investigate whether they qualify for council tax benefit and disabled people should ask whether they are entitled to a reduction.

More information is given on the Directgov website at Council Tax Discounts Exemptions and Financial Help or contact your local council direct. 

Tax Credits – check whether you are getting the right amount

As we approach the end of the tax year, it is important for tax credit claimants to think about what their household income figure is likely to be for 2008-2009 and let HMRC know. In most cases, updating income in this way will not change this year’s award. However, it will help make sure that HMRC have your most up-to-date information so that they can pay you the right amount from April 2009. This is the best way to try and prevent any overpayments building up, which can happen if HMRC continue to pay you based on out-of-date information.

Don’t worry if you do not have the exact figure. It is fine to provide an estimate at this point. Remember that even if you do give HMRC an updated figure now, you must still complete your renewal papers that will be sent to you after April 6th. These papers will ask you to confirm your actual income for 2008-2009.

Many people have had a reduction in income recently due to job losses throughout the country. Some people have found that, even though one person has lost their income, they cannot claim any more tax credits. This is because tax credits work by spreading your income out across the whole tax year, and so even though you might not be earning anything now, your income over the whole year is still too high to claim tax credits. If you are in this situation, you can contact HMRC after April 6th and ask them to base your new 2009-2010 award on an estimated current year income which will take into account the fall in your income.

However, if you choose to do this you must remember not to overestimate the fall in your income. If you do, and your income later rises in the year, it is likely you will have an overpayment.