Income tax planning can make a significant difference to the tax you pay. By planning for income tax, you should be able to take advantage of any opportunities to minimise your tax bill. Personal tax planning can present additional options, for example in terms of capital gains tax and inheritance tax.
This outline provides a brief introduction to personal income tax planning and other personal tax planning issues. If you are in business, this should be part of a broader look at your overall business taxes.
Income tax planning can offer significant savings in two areas.
Your employer may offer various employee benefits, some of which — such as various employee incentive schemes — offer tax advantages. Your income tax planning should include assessing the value of these benefits to you and their tax effects. Planning for income tax is also important for company cars, which can involve a sizeable tax charge.
Equally, planning for income tax should carefully consider the value and tax consequences of tax relief on pension contributions — whether these are contributions made by your employer, yourself or both of you. A final salary occupational pension scheme can be a particularly valuable perk.
Basic income tax planning should include keeping adequate records and preparing for income tax returns. The self-employed, company directors, high earning employees and anyone with complex tax affairs must complete a self-assessment tax return.
Income tax planning should take into account the income tax treatment of savings. Simple income tax planning steps can include using ISAs or transferring savings to your spouse to eliminate or reduce income tax (and capital gains tax).
Individuals with a high income or large savings may want to consider other options. There are substantial tax breaks for investing in venture capital trusts or unquoted shares that qualify under the Enterprise Investment Scheme. Making pension contributions on behalf of your children can also offer tax advantages.
Longer term, tax planning for savings should also consider ways of reducing any inheritance tax liability.
Owning your own property is relatively lightly taxed, though you are likely to pay stamp duty when you purchase a property as well as being liable to council tax. Unlike most other investments, your main home is exempt from capital gains tax.
The situation is different if you own investment properties or use your home to generate income by renting it out, for example. Planning for income tax on property is vital, as the tax treatment can be complex and you will also need to consider your exposure to capital gains tax.
For effective personal and income tax planning, you should take advice on your own circumstances.