So you’ve left it till the last minute again? All those months of watching Adam Hart-Davis on the telly, insisting that “tax doesn’t have to be taxing”, have failed to leave their virtuous mark on you? And so now you’re cancelling all your spare-time engagements to sit down with a calculator and a bottle of paracetamol while you get your Self-Assessment form filled out?
Well, don’t say nobody warned you. You now have until 31 January to get your form completed, calculate the tax you owe, pay the tax, and get the whole thing off to the Inland Revenue, on pain of a £100 fine. Plus late payment interest. As if you didn’t know...
But perhaps the blood, sweat and tears won’t be completely wasted if we can save you a few pounds of tax. There are quite a few little wrinkles that hardly anybody uses, even in this knowledgeable day and age, and some of them are very likely to be of benefit to you. You think you’ve heard it all before? Read this first.
How to make it quick and simple
Most of us are aware that you can file your tax form online, rather than making the usual 5 pm dash to the tax office on deadline day – but not very many of us ever get round to doing it. That’s partly because it takes a bit of planning and foresight – something that you’re obviously not very good at if you’ve left your tax form this late. It takes about a week to set up your account before you get your PIN number from the Revenue, so you need to get cracking before, say, Saturday the 21st if you want to be sure of making it in time.
The online site at www.ir-portal.gov.uk/index.jsp will definitely make your task easier, because it includes a calculation facility that helps you work out how much you need to pay and then prepares a completed tax return and statement of account for you. All you need to do then is pay your tax either with a debit card (no credit cards) or a cheque, and the job’s done.
You’ll need to know your unique taxpayer reference (UTR), which you’ll find on your tax return or on your statement of account, plus your National Insurance number or your postcode. There, that wasn’t so bad was it?
Make sure to claim your allowances
If you don’t know all the standard credits and allowances that are available to you, then it might be getting a little too late to chase them all up. Accountants and financial advisers are usually working 24-hour shifts by this time of the year, so you’ll probably have to do some of the research yourself. But generally speaking, this is a good moment to ensure that you’ve used up all your personal allowances – on income tax, capital gains tax and inheritance tax.
You can find lists of the allowances on various websites, but I particularly like the ones on the Citizens Advice Bureau site at, www.adviceguide.org.uk/index/life/tax/income_tax_allowance_amounts.html, because they carry information for six tax years in one table.
Married couples in particular should aim to optimise their situation so that each pays the least possible tax while also using up all the available allowances. This will sometimes mean transferring the actual ownership of assets between themselves, as well as the investment income that accrues from it. Okay, it might be getting a little too close to the wire for that sort of transaction this time round, but it’s worth bearing in mind for next year.
The excellent Small Business website (www.smallbusiness.co.uk) reminds us that if you’re running a business and you’re not earning much money yet, you are perfectly entitled to postpone your claim for capital allowances in respect of computers, equipment and the like, so that they come up in a future year and not in this outgoing year. There’s no point in having a fistful of allowances if you’re not going to be paying very much tax in the first place! Better, perhaps, to wait until next year, when you might be paying a higher rate of marginal tax on your earnings, or receiving a lower allowance.
If you’re aged 65 or over, you’re eligible for an age allowance – a higher than average personal allowance that’s available in full to everyone with an income of up to £18,900 a year (including pensions). In 2004/2005 the allowance was worth £6,830 for people aged between 65 and 74, or £6,950 for those aged 75 or over. But as soon as your income (including pensions) rises to £18,901 you start losing 50p in the pound until you’re back down to the basic personal allowance (£4,745). So, common sense says that you should try to arrange your affairs so that at least one of you has an income of £18,900 or less.
Inheritance tax exemptions
Most people know that the law allows you to give away £3,000 a year to your friends and family without incurring inheritance tax. It can be a great way of reducing your IHT liability, and it’s particularly timely if your children or your grandchildren are currently starting out on some expensive venture, such as university study or first-home ownership. Remember too, that you and your spouse can give £3,000 each.
But did you know that you can carry forward any unused allowances from last year as well? If you didn’t make your gift in 2003/2004, then you can claim on donations of up to £6,000 on the tax form that’s right in front of you now. But don’t hang around, because the law only allows you to carry forward the gift for one 12-month period. After that, if you haven’t used it it’s gone for good.
Gifts to charity
Under the Gift Aid scheme, your cash donations to British charities can qualify for a 22% tax top-up from the Inland Revenue during the year in which you made the gifts, plus 18% to you if you’re a higher-rate taxpayer. But at this time of the tax year our thoughts turn instead to gifts of shares, property, bonds or money that you make outside the Gift Aid system. By making them now and then recording them on your tax form, you don’t just get maximum-rate tax relief on your donations – you also qualify for complete exemption from capital gains tax on the gifts.
Giving away your wealth to charity is an excellent way of reducing your CGT liability if, for instance, you made a particularly large capital gain in the tax year 2004/2005 – by selling your holiday home, for instance.
But here’s the really good part. If you act now, before you send in your tax form, you can also stuff your gifts from 2005/2006 back into the period 2004/2005, so that you effectively bundle two years’ gifts into one tax year.
Why would you want to do this? Once again, mainly to optimise your tax benefit. Perhaps you’ve made a lot of profit in one of those years and you want to get the maximum amount of relief at your optimal marginal tax rate? Or maybe you’re simply moving from a higher income tax band to a lower one, and you want the higher rate of relief? Either way, everybody benefits from your timely action.
How do you make these last-minute charitable gifts? In principle, it’s easy. You just give the assets to the charity of your choice, in return for which you get the all-important receipt that the taxman will need to see before he’ll be prepared to believe in your largesse. But in practice you have a problem if your gift isn’t simply a cash sum. You’re in a hurry now, and you’ll be in a proper mess with the taxman if the charity returns your property gift or your bonds (e.g. because it can’t process them) after you’ve already claimed the rebates and CGT deductions! So if in doubt, make your gift instead to the Charities Aid Foundation (www.cafonline.org), which will sell it and pass on the proceeds to your intended charity.
Pension contributions
There are two sides to the pensions issue that we ought to consider here – the benefits and the contributions. On the benefits side, most of us assume that our pension incomes are fully subject to income tax – and rightly so, because they are. But if you’re getting a state pension from a foreign government it will generally qualify for a 10% reduction in its taxable value. Tick box 11.13 on page 16 of the tax form to claim this allowance.
The more obvious advice would be to consider mopping up any unused pension contribution entitlements from 2004/2005, by making a payment before 31 January. Plus another one for 2005/2006 by 5 April! This is your last chance to make contributions under the old tax regime before A-Day, the pensions reform programme which will abolish all limits on your contributions. (Subject to an annual maximum of £215,000, or your entire annual income, whichever is the smaller.)
But here we go again. Why, if the quotas are being abolished, should you rush to meet them now at the 11th hour? Well, the answer is that after A-Day your contributions will be subject to certain restrictions that don’t apply now. The most important of these restrictions is that you won’t be allowed to draw more than 25% of any pension funds you might have as a cash lump sum when you retire. At present, some plans allow up to 100% cash drawdown upon retirement.
Indeed one of my own pension plans, dating back to before 1986, allows me up to 40% cash. But I can preserve that right indefinitely by registering my pre-ADay policy with the Inland Revenue before A-Day. And meanwhile I’ll be thinking very hard about filling my plan’s boots with cash! I suggest you do the same.
So that’s our rundown of the last-minute opportunities that are still open to you as you chew your pencil in the wee small hours. Good luck with the forms. Be honest, be careful, but above all be on time.
Action to take:
For information on how to file a tax return online contact: www.ir-portal.gov.uk/index.jsp.
For information on your entitlement to allowances:
www.adviceguide.org.uk/index/life/tax/income_tax_ allowance_amounts.html
For small business information: www.smallbusiness.co.uk
For information on charitable giving: www.cafonline.org
P.S. If you enjoyed this article then we encourage you to sign up for The Zurich Club. Gain access to a seasoned panel of expert’s, whose tips and advice are intended to deliver top notch gains.