Top tips for year-end tax planning
6 April is around the corner – do you need to review your personal finances?
Use of tax and other allowance
If you are married or in a civil partnership then it is possible to transfer assets tax free to benefit from the use of tax-free allowances or unused lower rate tax bands.
- For dividends; the first £2,000 of dividend income for any UK taxpayer is tax free. Whilst this amount is still included within your taxable income no Income Tax (IT) is charged. If your spouse or civil partner is not using their dividend allowance you may wish to consider transferring some shares to benefit from this. As a higher rate taxpayer you could save up to £650 tax per annum.
- For interest; a similar relief exists with Basic Rate Tax payers being able to receive up to £1,000 Income Tax per annum. This is reduced to £500 for Higher Rate Tax payers. Additional Rate Tax Payers are not entitled to this relief.
- Claiming the Transferrable Allowance; where you are a basic rate tax payer and your spouse of civil partner has income less than their personal allowance (“PA”) they can transfer up to 10% of their unused PA so that you receive a 20% tax credit on this amount. The maximum claim equates to a £250 tax saving for 2020/21.
- Utilising your Capital Gains Tax Annual Exemption; this is currently £12,300 and is offset against all capital gains (net of capital losses) in the year. Transferring assets such as shares, or unencumbered property, before sale (generally exchange) may help reduce Capital Gains Tax by £3,444.
- Maximising the use of your ISA allowance; this is currently £20,000 per individual for UK tax residents which will also remain the same for the next tax year, allowing for tax free growth. Any unused allowance cannot be carried forward. So, if you do not this by 5 April 2021 you will lose the opportunity to do so.
- Maximising the use of your Personal Allowance; Most people are able to have an income of £12,500 in the current tax year before income tax is payable. If your taxable income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income over £100,000 which means that your personal allowance is lost with income over £125,000. Making a pension contribution or gift aid donation could help reduce income for this purpose as could transferring assets which generate an income to help preserve allowances in future tax years. This can also help level income where Child Benefit is being claimed within the family as restrictions to this apply where one person’s income exceeds £50,000.
Gift Aid Donation
If you are thinking of donating to charity you could save tax at the same time. GADs extend both the Basic Rate tax band and Higher Rate tax band by the amount you donate plus 20% and can even be treated as if they were made in the previous tax year.
It is important that you make the appropriate gift aid declaration and obtain evidence of this in order to make a claim on your self-assessment tax return.
In the same way as a GAD; pension contributions can reduce your tax liability by increasing the tax thresholds. An £800 pension contribution could cost a higher rate taxpayer £600 due to the way the tax relief is applied.
Generally, the maximum pension contribution, on which tax relief can be claimed in a tax year, is £40,000 gross – this includes personal, employer and third-party contributions. This is reduced where:
- Your income, from all sources, is more than £200,000 in the same tax year; and/or
- You are receiving pension income from a flexi-access drawdown arrangement – limit reduced to £4,000; or
- Your pensionable earnings is less than the pension contributions made.
If you do not have any earned income, and you are under age 75, you are able to add £3,600 (gross equivalent) to a pension plan and receive basic income tax relief at source.
The maximum sum which can be saved in a pension scheme over your lifetime without incurring tax charges is £1,073,100 – this amount is set to increase with CPI each tax year and with inflation so low at the moment we will see an increase to £1,078,900 from 6th April 2021. If all of your pension funds are in excess of this amount (excluding your state pension) you may suffer a tax charge of between 25% and 55%. It may be possible to apply to HMRC for protection if you meet certain criteria.
Defined benefit or final salary pensions are included as part of this calculation, as well as any pensions in payment. We would recommend you seek independent financial advice in this respect.
It is important to speak with a financial advisor before any pension planning is undertaken.
As a final point, you may wish to consider tax efficient investments. Here are a few tax reducing investments that you could make:
– Enterprise Investment Scheme (EIS)
– Seed Enterprise Investment Scheme (SEIS)
– Venture Capital Trusts (VCT)
Where making such investments are appropriate to your circumstances you could get up to 50% Income Tax relief on the investment made (SEIS) as well as the benefit of tax-free gains and the possible use of Capital Gains Tax deferral relief if you have sold other investments in the correct time period.
Like with pension planning, speaking with an independent financial advisor ahead of taking any investment steps is recommended.
Contact us for assistance with your personal finances before the end of the tax year.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
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