Spring clean your finances
You might not believe it given some of the blustery weather this week, but we are now well into spring. And as we rapidly approach the end of the tax year, now is as good a time as any to review your finances, says personal finance writer ADAM AIKEN.
Spring cleaning might be more commonly associated with getting the duster out and giving the house the annual once-over, but blowing the cobwebs off your financial affairs is just as important.
That, at least, is the message from the experts at financial and business adviser Grant Thornton, who say that now is a good time for people to review their finances and consider ways to potentially reduce tax burdens.
“The last thing any of us wants to do is effectively pour money down the drain by handing it over needlessly to the taxman,” said Martin Hales, senior manager at Grant Thornton's Norwich office.
“The government's receipts from income tax and national insurance have increased by nearly 34pc in the last six years, which suggests that more and more of us are now higher-rate taxpayers.
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“One reason for this is likely to be that wages have risen faster than personal allowances and tax rate bands, which are inflation-linked.
“Receipts from capital gains tax and inheritance tax are also increasing, so it is important that we take advantage of all possible relief, allowances and exemptions.
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“Careful planning can reduce the family's total liability, and maximise overall wealth.”
Here are some of the things we can do if we want an easier ride in the future.
t FAMILY: Each member of the family, even a child, is treated as a separate taxpayer and has his or her own personal allowance and exemptions. Therefore, spreading assets and income around the family can reduce the overall tax bill. Married couples should make the most of personal tax allowances and the 10pc and 22pc tax bands by transferring income-producing capital to the spouse with the lower income. This may prevent one partner paying tax when the other has not yet used all his or her allowances. For example, transferring the ownership of bank or building society accounts can help. Parents supporting children through university can consider a gift of income-producing assets to children over 18 to make use of allowances and tax bands.
t CHILD TRUST FUNDS: Child trust funds are intended to provide money and assets for children when they reach 18. All UK-resident children born after August 31, 2002, are eligible for a fund. The government makes an initial payment into the fund of £250 and a further contribution when the child is seven. Parents and others - including the child - can contribute up to £1,200 in each tax year. Income and gains within the fund are exempt from income and capital gains tax.
t TAX CREDITS: Working tax credit can be claimed even if you do not have children, while child tax credit is available to families with children. Some credits do not start to taper out until household income reaches £50,000. Even if you don't qualify for benefits based on current household income, you could consider a protective claim for benefits in case circumstances change.
t CAPITAL GAINS TAX EXEMPTIONS: You should try to realise capital gains up to the £8,800 annual exemption available to each individual, including children. This exemption cannot be carried forward if it is unused. A form of tax relief - known as taper relief - based on the length of ownership applies to everyone holding an asset. Basically, the longer you own that asset, the lower the rate of capital gains tax you may have to pay when you sell it. There may be an advantage in delaying the sale of an asset beyond April 5 to secure a further year's taper relief. An added bonus is that any tax due will also be delayed for a year. If you have two homes, and reside in both, consider making a main-residence election.
t INHERITANCE TAX: As house prices increase, more of us have potential inheritance tax (IHT) problems (see page 25).
An essential part of IHT planning is to ensure that life policies and pension arrangements should be written in trust. This avoids the proceeds of any policy being included in the estate on death. If the policy falls within the estate it could be caught by IHT, but if the proceeds go directly to the beneficiaries there is no tax.
t PROTECTION/INSURANCE: One of the main risks to a family's financial security is loss of income through the death of the main earner. Fortunately, the risk can be covered by insurance. The main areas to consider are medical treatment, long-term and critical illness, death in service and family income benefit, term assurance, and whole-of-life cover.
t PENSIONS: The annual contribution limit increased significantly last April and is now 100pc of earnings, up to a maximum of £215,000. However, it is not possible to carry back contributions or carry forward unused relief. To make the most of the new limit, the payment must be made by April 5. People without earnings are still entitled to make gross contributions of up to £3,600 a year in stakeholder pensions, which are available to all UK residents, including children. People nearing retirement age should ask the Department for Work and Pensions for a forecast of their projected state pensions. It may be possible to buy 'extra years' of contributions.
t INDIVIDUAL SAVINGS ACCOUNTS: Isas were introduced in 1999 as tax-free savings investments. A taxpayer able to make the maximum permitted contribution each year would by now have built up capital of £56,000 plus any tax-free growth. UK residents over the age of 18 can invest in one 'maxi Isa' or three 'mini Isas' each year. The current maximum annual contribution is £7,000 and, as unused allowances cannot be carried forward, this year's contribution must be made by April 5. Income and capital gains within Isas are exempt from tax and withdrawals may be possible without loss of tax relief. Although new subscriptions to personal equity plans (Peps) are not allowed, continuing Peps receive the same favourable treatment as Isas.
t GIVING TO CHARITY: This has become more sophisticated, yet despite the introduction of Gift Aid in 2000, fewer than one in three donations in the UK are tax efficient - resulting in £700m each year going to the Treasury rather than the charity. In addition to Gift Aid and payroll giving, it is possible to help charities with gifts of quoted stocks and shares.
This does not give rise to a capital gains tax liability. Instead, in the case of shares, income tax relief is due at an individual's highest rate of tax - this is based on the value of the shares at the time of the gift.
For more detailed, individual financial advice, call Grant Thornton on 01603 620481 or www.gtuk.com. Alternatively, visit www. unbiased. co.uk.