Christmas comes but once a year and while, one hopes, this is accompanied by a feeling of goodwill and generosity to all, this may not extend to HMRC! In fact, perhaps the seasonal expenditure on family and friends may prompt the idea that this may be softened by tax savings elsewhere. Here are a few ideas that could be relevant to individuals.
Most UK residents are entitled to a personal income tax allowance (currently £12,570). Make sure it is included in a PAYE code, and it is worth checking overall tax liability at the end of the tax year. There are also allowances for bank and building society interest, dividend income and small sources of income (less than £1,000) from trading or property. Married couples not using their full allowance should consider whether they can transfer part to their spouse or civil partner.
Those with shareholdings should consider whether they are making use of their annual capital gains tax (CGT) allowance and spouses and civil partners could also consider whether assets might be transferred between them to minimise tax liabilities.
Individual Savings Accounts
An individual can invest up to £20,000 a year into an individual savings account (ISA). Interest, dividends and capital gains on assets held in these accounts are free of income tax and CGT. If aged over 18 and under 40, the lifetime ISA allows the holder to invest £4,000 a year until they are 50 and, subject to conditions, the government will add a 25% bonus to the amount saved. Parents could pay into a junior ISA for children aged under 18 and living in the UK.
Employees should ensure that they are claiming tax relief on any expenses that are incurred ‘wholly, exclusively and necessarily’ in performing the duties of their employment. This might include travel and subsistence, laundering uniforms, professional subscriptions, as well as the weekly allowance of £6 if the working from home conditions are met.
Perhaps we might consider pension saving as a gift to our future selves or family – longer-term saving for future Christmases, perhaps. Even those without relevant earnings can contribute £2,880 a year, to which the government will add a further £720 so that £3,600 is invested into the pension scheme; and there is no lower age limit. Growth within the plan is tax-free, and higher earners can receive tax relief at the higher and additional rates of income tax.
There are inheritance tax (IHT) exemptions for business assets and agricultural property, as well as shareholdings that qualify for relief under the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS). Such shareholdings and venture capital trust (VCT) holdings also benefit from income tax and capital gains tax reliefs.
Those considering more substantial gifts should consider the IHT implications and possible reliefs. Gifts made in the seven years before death are taken into account in calculating the liability of the estate. However, those who may potentially be within its scope might consider that up to £3,000 can be given each year without being included in this, and there are further exemptions for small gifts (£250) and larger exemptions for gifts on marriage.
Also, do not overlook the exemption for regular gifts out of income.
A Time for Charitable Giving
Finally, we should acknowledge HMRC’s provision of the above tax reliefs and, perhaps most of all, the reliefs for charities and to the income tax, CGT and IHT reliefs available on gifts to them.
Taxpayers making gifts under the gift aid provisions enable the charity to increase its receipt by 25%, and higher and additional-rate taxpayers will reduce their liabilities. And what better time of the year to be generous to others? Merry Christmas, one and all!
Prepare an annual summary of tax liability and consider whether better use of tax allowances and tax-advantaged savings might be beneficial