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LITRG offers some tips to consider before the tax year end on 5 April, including how to make sure you are not paying too much tax and make the most of your tax allowances.

Introduction

The tax year end is a good point at which to review your finances, so below we offer some tax saving tips.  For more practical issues to consider before 5 April and for the 2010/11 tax year ahead, you can read our separate article on tax and tax credits issues (see link below).

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.  But here are some ideas to maximise the tax efficiency of your savings:

Individual Savings Accounts

Putting your cash savings into a tax-free Individual Savings Account (‘ISA’)is a sensible decision for most people.  But did you know that the maximum you can invest is increasing?  When the changes come in depends on how old you are – those aged 50 or over can already pay more in (as the limit for them increased from 6 October 2009), but everyone else has to wait until 6 April 2010.  If your 50th birthday falls before 6 April 2010, you again qualified for the higher investment limit as of 6 October 2009. The new limits are given below.

If you have savings in non-ISA accounts, you might want to consider switching them into ISAs if you would otherwise pay tax on them.  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. 

You can put £7,200 into an ISA, but only £3,600 of this can be held in cash. The 2009 Budget increased the annual investment limit to £10,200 per person, £5,100 of which can be held in cash; this higher limit is available to all from 6 April 2010, but in the 2009/10 tax year only to people aged 50 and over. 

You can also hold stocks and shares and other types of investment in ISAs. 

Getting your interest without tax taken off

If your total income for a tax year falls within your tax allowances (ie 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 to download or ask for one at your 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 no longer have to pay tax. 

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 a personal allowance, but if you don’t use it all it is not transferable to the other (note, however, there are special rules for transferring blind person’s allowance and married couple’s 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, so make sure you investigate your options carefully. 

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, 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 (£10,100 per person for 2009/10) before 6 April.  If you have made a loss, you might need to consider notifying HM Revenue & Customs so that you can offset it against future gains.

Perhaps a topical point in the current economic climate is that if an asset becomes more or less worthless, it could be considered to be of ‘negligible value’, allowing you to claim a capital loss equivalent to your original investment in it.  HMRC provide a list on their website of company shares and securities which they have already agreed to be of negligible value.  Once claimed, the loss can be set against gains in the same tax year or carried forward to future years.  A bit of careful consideration is needed, however, before claiming the loss.  If you have other gains in the same tax year which are within your annual exemption, the loss will still be used against them if it is claimed so you might be better off waiting to claim it in a later year.

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 (currently £325,000 per person).  You can give away some amounts during your lifetime which can save inheritance tax when you die.  In particular, some exemptions apply per tax year, so you might want to consider making gifts before 6 April. 

Useful links

Tax and tax credits – action before 5 April

HMRC’s ISA factsheet
‘Getting your interest without tax taken off’ - form R85

LITRG guidance on personal allowances, age-related allowances, blind person’s allowance, married couple’s allowance and the 10% savings rate

More about state pension deferral on Directgov 

LITRG guidance on Gift Aid for non-taxpayers
LITRG’s introductions to capital gains tax and inheritance tax