The new tax year – act now or pay later?

Many people, and even professional advisers, will leave tax planning to the last minute – using up ISA allowances and making pension contributions in the final few weeks of the tax year. However, as we enter the 2016/17 tax year, getting your planning done early is very much the order of the day.

There are some issues to be aware of and taking action now could make a big difference to your tax liabilities for 2016/17 and beyond.

Use your ISA early

Business owners who receive the majority of their income by way of dividends should ensure that any investments that could generate any dividend payments are sheltered in an ISA at the earliest opportunity.

You can usually utilise the “Bed & ISA” facility to help transfer any existing investments you may hold into an ISA and doing this early will mean any dividend payments occur within the ISA and will not be added to your income for the year.

This doesn’t just apply to business owners either. If you receive dividend income from your investments that exceeds £5,000 pa then using your ISA allowance early could also be of benefit.

Pension changes – don’t get caught out

There are some big changes this tax year and many people could get unwittingly caught out as a result.

The first is a reduction in the Lifetime Allowance (the total value of all your pension benefits before you pay punitive tax charges) is reducing to £1m to £1.25m. Some people will be able to protect the previous value of £1.25m through something called Fixed Protection however in order to do this, no pension contributions should be made after 6th April 2016.

The second change is a reduction in the Annual Allowance (the amount you can pay into pensions and receive tax relief) for higher earners. Those with total incomes above £150,000 will see the allowance restricted and for some people it could be as low as £10,000 compared to the standard allowance of £40,000.

This allowance includes both employer and personal contributions too so again, this is an important consideration for business owners who may make larger lump sum contributions from their business.

If the annual allowance is exceeded, then those individuals will face a tax charge at the end of the year. Therefore, it will be important to be aware of this and make any adjustments to contributions accordingly.

Failing to prepare is preparing to fail

There are plenty of changes to taxation and pension in this tax year and failing to plan for them at the earliest opportunity could lead to quite punitive consequences in terms of additional tax charges.  Planning early in this tax year is more important now that it possibly ever has been.

If you or your clients would like any help in working out the best way to plan for these changes and how to make the most of the opportunities available, feel free to get in touch.

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