Chancellor George Osborne’s spring Budget will have plenty of announcements, but probably little that is unexpected. In any event, his past two Budgets have introduced a wide range of tax changes, some of which have yet to take full effect. These changes mean that the checklist for year-end tax planning in 2011/12 is not the same as in previous years.
There are a number of things you need to consider before the Chancellor rises to speak this coming March.
The start of the new tax year on 6 April will see several important revisions to pension law taking effect, as we explain in The Pensions Revolution Continues. However, many changes took effect last April and some are now part of year-end planning. For example, the reduced £50,000 annual allowance and the new carry forward rules both apply in 2011/12 and could impact on your year-end pension contributions.
In particular, the carry forward provisions have created a deadline of Thursday 5 April 2012 for using up to £50,000 of unused allowance from 2008/09. The calculations involved are complex, so planning is best started as soon as possible.
Rumours that the Chancellor would end higher rate (and additional rate) tax relief on pension contributions re-emerged in the run up to the Autumn Statement. Just in case Mr Osborne is unable to resist the £12 billion a year in extra income this time around, it could be a wise precaution to make any planned 2011/12 pension contributions before Budget Day (21 March).
Tax saving with individual savings accounts (ISAs)
Your 2011/12 ISA contribution limit is £10,680, rising to £11,280 from 6 April 2012. The Junior ISA, introduced last November, has a limit of £3,600 which will not change in April. Maximising your ISA investment will usually make sense because:
- Dividends and income from fixed-interest securities held within a stocks and shares ISA are free of personal UK tax, although you cannot reclaim dividend tax credits.
- Interest earned on deposits in a cash ISA are also UK tax-free. However, the returns on offer reflect the fact that the base rate shows very few signs of moving above 0.5%.
- Gains made within ISAs are free of capital gains tax (CGT).
- There is nothing to report on your tax return.
Your CGT annual exemption
While 2011 was not a profitable year for many major stock markets, if you have held shares or share-based investments for several years you may well have unrealised gains. It could be advisable to realise some of these gains before 6 April. In 2011/12 you can crystallise gains of up to £10,600 without any liability to CGT. The exemption cannot be carried forward, so you lose it if you do not use it.
Inheritance tax (IHT)
The IHT nil rate band of £325,000 is now in the middle of a freeze that will last until April 2015. This means it is all the more important to use your annual IHT exemptions.
The main £3,000 annual exemption can be carried forward, but only to the next tax year (2012/13), and then can only be claimed once the 2012/13 exemption has itself been used up. If you and your partner have not made any gifts since 6 April 2010, you could now jointly give away £12,000 free of IHT.