With the end of the current tax year looming and what might prove to be a radical spring budget from the Chancellor imminent, time is running out to consider and implement last-minute tax planning opportunities.

In recent years, popular debate has muddied the waters between tax avoidance and tax evasion. Regardless of moral considerations, the former is legal and the latter is illegal. It is perfectly legitimate to organise one's affairs in order to take advantage of tax reliefs and allowances.

The precise purpose of such reliefs and allowances is for government to influence behaviour in a way that should be both beneficial for government finances and the wider economy; so it is important not to be duped by populist propaganda into paying more tax than you need to.

The fact is that the UK tax system is incredibly complicated with the result that it is seldom truly progressive and there are far too many nasty pitfalls that can unfairly penalise the unwary or inexperienced. Here are some common pitfalls and opportunities to consider.

Year end income tax planning
Personal income over £150,000 is taxed at the rate of 45%. However, this is not the effective top rate of income tax. This is because the personal income tax allowance is reduced by £1 for every £2 of income over £100,000. As a consequence, the effective top rate of tax is 60% for those with an income between £100,001 and £122,000. Individuals with a level of income close to these thresholds can substantially reduce their tax liabilities by taking advantage of opportunities to reduce their taxable income below £100,000.

For some people it might be possible to defer income or change it into non-taxable forms. However, at this late stage in the tax year the most common methods are making pension contributions and/or making charitable donations under gift aid.
Another important income threshold for many is the limit that governs entitlement to child benefit. The value of child benefit is cancelled out by the tax charge if the taxable income of the highest earning parent exceeds £60,000. There is no tax charge if the highest earner has income of £50,000 or less. An individual pension contribution reduces income for this purpose, so the tax charge could be avoided. Child benefit is worth over £2,500 per annum to a family with three children. The combination of higher rate tax relief on the pension contribution plus the child benefit tax charge saved, can lead to an effective rate of tax relief as high as 65% for a family with three children.

For 2016/17 onwards, the new dividend allowance of £5,000 means that dividends up to this amount can be received free of personal tax, no matter which tax band the dividend falls into. For those who run their own business and have control over the timing and payment of dividends, it makes sense to ensure this allowance is fully utilised. Once the allowance is used, the effective tax rate for company owners (allowing also for corporation tax deducted) is excruciatingly high at 46% for higher rate taxpayers and 50.58% for additional rate taxpayers. The rate of corporation tax is reducing in 2017/18 so there might be merit in delaying the recognition of profits where it is permissible.

Over the years, many investors have invested money in both onshore and offshore investment bonds. One of the attractions of such investments has been their ability to defer personal tax by taking advantage of an annual withdrawal allowance set at 5% of the original investment. However, what is deferred usually becomes payable eventually and those with large gains accrued in such arrangements could be liable to a substantial income liability when they decide to cash in their investment.

Top slicing
relief can be used to amortise profits over a number of tax years, possibly reducing or eradicating a liability. The rules are complex so care is needed.

For experienced investors, specifically those who have experience in making investments into businesses directly, it is possible, under the seed enterprise investment scheme, to claim income tax relief on investments in start-up companies up to £100,000. Investors can claim income tax relief at 50% (whatever their highest effective tax rate), but of course the risks are high and expert advice is necessary.

It is also possible to invest in established unquoted companies (and also companies listed on AIM) through enterprise investment schemes to secure income tax relief, at a flat rate of 30%. Once again, such investments can be very risky so they are not suitable for most people and expert advice is essential.

Year end capital gains tax planning
It is possible to realise capital gains tax-free up to the annual exemption of £11,100 for 2016/17. Married couples and civil partners can transfer assets between them without crystallising a gain and this should be considered where it is possible to use both annual exemptions.

It is also worth bearing in mind that for 2016/17, capital gains tax rates for individuals have reduced (for higher rate and basic rate taxpayers) from 28% to 20% and 18% to 10% respectively. These rates are historically low and might well increase again in the future. There might therefore be merit in bringing forward crystallisation of large gains that have been accrued over time.

Year end Inheritance tax planning
Inheritance tax is paid on the chargeable value of your estate above the nil rate band, which is currently £325,000. One of the most effective ways to reduce a prospective inheritance tax liability is to diminish your future estate by giving away money before you die. There are many methods that can be employed to achieve this although the one that is tax year sensitive is the annual gift exemption of £3,000. This is the amount that can be gifted free of inheritance tax with immediate effect (usually there is a requirement to survive the gift by 7 years). It is possible to carry forward any unused gift exemption from the previous fiscal year so time is running out to utilise any unused exemption from 2015/16.

Year end investment planning
It is possible to invest up to £15,240 in an ISA for 2016/17. The tax benefit is that any future income and gains will be free of personal tax. Whilst the tax benefit might be marginal for basic rate taxpayers, it is important to bear in mind that often the cost of investing in an ISA is no greater than holding the same investments in another way. Furthermore, a modest ongoing tax saving might become a substantial ongoing tax saving as your circumstances evolve, your money grows in value, and the tax regime changes.

What to do next
Tax planning implementation can take time, and time to act in the current tax year is running out. The actions referred to in this article are by no means exhaustive and you should seek advice before proceeding. We would be delighted to assist with your tax planning needs so please contact us if you would like us help you make the most of your options for the current tax year and beyond.