Ten New Year tax tips

If there is a New Year resolution that is worth keeping, it is the promise to get your tax affairs in order. Patrick Stevens of accountants Ernst & Young highlights ten practical tax tips for 2005.

One - tax return

Your tax return needs to be with the Inland Revenue by 31 January 2005 at the very latest so if you have not already submitted it, this should be your first priority. This is the return for the 2003/04 tax year and relates to your income and gains for the period from 6 April 2003 to 5 April 2004.

If you are quick, you can still register to fill it in online but remember that it may take up to seven days for a PIN number to arrive following registration.

If you are filling your return in by hand, check to make sure that you have the right supplementary pages. You can download additional pages from the Revenue website or by ringing the Self Assessment orderline on 0845 9000 404.

A fixed penalty of £100 applies if your return is not with the Revenue by 1 February following the end of the tax year. This penalty cannot exceed the amount of tax due for the year and the penalty will be subject to amendment once the final liability is known.

Two - timing

If you are employed and submitted your return by 30 September 2004 (or 30 December 2004 if you submitted over the internet), any outstanding tax liability will generally be collected via your PAYE code. Otherwise any outstanding balance should be paid by 31 January 2005. If you are self-employed, 50% of your estimated liability for 2003/04 should have been paid on 31 January 2004 and 31 July 2004. Any remaining balance will be due by 31 January 2005 together with 50% of your estimated liability for 2004/05.

In either case, any tax due on your chargeable gains for the year will also be payable by 31 January 2005. Interest will be due if your tax payment is late and an additional surcharge will apply if the payment is more than six months late.

Three - Married couples

Ernst & Young advises that married couples should consider arranging their affairs to ensure that both spouses to the fullest possible extent use both personal allowances and the lower and basic rate bands of tax. This may require transferring investment income from one spouse to the other but remember that this can only be achieved where the beneficial interest in the underlying capital is also transferred.

Four - Children

Are your children making the most of their personal allowances? If they have income from a bank or building society account and the total income for the year is less than their personal allowance, the child (or the parent on their behalf) can register to receive the income gross without deduction of tax. However, remember that if the income is derived from money that the parent has put aside on the child’s behalf then the income (if it is in excess of £100) will be taxed as the parent’s income (at the parent’s marginal tax rate) while the child is unmarried and under 18.

Five - Child trust funds

Child trust funds come into effect from 6 April 2005 and all children born on or after 1 September 2002 are eligible provided they are resident in the UK. It will not be necessary to submit a claim because the details will be picked up automatically when the standard child benefit is awarded. The child benefit claimant will receive a voucher worth £250 representing the initial amount. The voucher will be increased by a further £250 for families entitled to full child tax credit and with household income at or below the child tax credit threshold (currently £13,480). The voucher can be used to open a special bank account, known as a child trust fund account, for the child.

Parents, family and friends may contribute up to £1,200 per year into the fund and any income arising in the fund will be free from tax. Child trust funds could represent a way of building a significant tax-free sum for your child; however, it is worth remembering that the money in the account can only be withdrawn by the child, and only when they reach the age of 18 so you will not be able to access the funds once they have been paid in.

Six - Over 65

Taxpayers aged 65 or over may be entitled to a higher personal allowance, the ‘age allowance’. For 2004/05 this allowance is restricted if the individual’s income exceeds £18,900. For every £2 of income in excess of this amount the additional allowance is reduced by £1 until it reaches the level of the basic personal allowance. A higher married couple’s allowance may also be available where at least one of the spouses had reached the age of 65 by 6 April 2000. Consider arranging your affairs to ensure that at least one spouse will have a total income not exceeding £18,900 for 2004/05.

Seven - capital gain

Capital gains tax can be expensive because gains are added to your total income and taxed at your marginal rate. However, because you can decide when to dispose of your assets, you can reduce your exposure to this tax with careful planning. The first £8,200 of chargeable gains are free from capital gains tax for 2004/05 which represents £3,280 of tax at 40 per cent.

It is, therefore, a good idea to make use of the annual exemption if you can, particularly since it will be lost otherwise. Any decisions will of course depend on your circumstances and on the status of the asset. Remember as well that spouses have separate annual exemptions, so you can make a gain of £16,400 on joint property without generating a liability.

Eight - inheritance tax

Continuing on the subject of allowances, similar planning can be implemented for inheritance tax purposes. You can give away up to £3,000 per year without an inheritance tax liability arising and, since unused allowances can be carried forward for one year, you may be able to give away as much as £6,000 this year depending on the gifts you made last year. In addition, you can give away a further £250 per individual without becoming liable to inheritance tax. Similar allowances apply to wedding gifts depending on your relationship to the couple.

Nine - tax credits

Don’t just assume that you won’t be entitled to tax credits. If you have children under 16 (or under 19 in full time education), and you work at least 16 hours per week, then providing your family income is less than £50,000 per year you could be entitled to at least £545 of tax credits.

The actual amount will depend on your age, your family circumstances and the number of hours you (or your partner) work per week. It does not matter whether you are employed or self-employed. And even if your family income is more than £50,000 you could still be entitled to something. If you haven’t already done so, contact the Inland Revenue for an application form. But remember that once you are claiming tax credits you are obliged to inform the Revenue of any changes in your circumstances.

Ten - Get organised!

Ernst & Young advises that there is one key task left for you to fulfil. By now you should be surrounded by pieces of paper having searched through files and drawers to find them. Do the right thing and put them somewhere safe in a file marked ‘tax return’. If you do, you will be ready to fill in your tax return on time when the tax year ends in April. If you forget, you can guarantee that you will spend the next New Year repeating this entire exercise!