Year End Tax Planning Opportunities
Monday 5 April, which marks the end of the 2020/21 tax year, is fast approaching – and what a year it has been. As vaccines bring hope and we all look forward to brighter days, in every sense of the meaning, some timely tax planning could benefit you.
Below is a list of the main allowances and reliefs that we recommend you consider:
Returns from an ISA are tax free and in the current tax year individuals can invest up to £20,000 in either a cash or a stocks & shares ISA, or a mixture of both. You can invest in a Junior ISA for anyone under 18 and a Lifetime ISA (LISA) is available to those between 18 and 40 saving towards a home or retirement. Remember ISA allowances cannot be carried forward past 5 April, so use it or lose it!
Most people get Income Tax relief on pensions contributions up to the annual allowance. For 2020/21 you can generally contribute £40,000 gross or 100% of your earnings (whichever is lower). As well as receiving a 20% top-up from the government on any net personal contributions you make, you may also be able to reduce the amount of income tax you pay by extending your basic rate band and/or reinstating your personal allowance and you may be able to claw back Child Benefit payments. Business owners can extract profits as a pension contribution, saving on tax and National Insurance liabilities. Any unused allowances from the past three years can be carried forward.
Use Your Annual Tax Allowances
For 2020/21 the Capital Gains Tax (CGT) allowance is £12,300 per person which cannot be carried forward – remember that assets may be transferred between married or civil partners without a gain arising. Marriage Allowance allows a basic rate taxpayer to transfer part of their spouse’s personal allowance to himself or herself, provided the spouse earns less than £12,500.
If you run your own business through a limited company, the first £2,000 of dividends that you draw is tax free, irrespective of other income. The personal savings allowance is £1,000 of tax-free interest for basic rate taxpayers, and £500 for higher rate taxpayers. There is no allowance for those paying tax at 45%. Two further £1,000 tax-free allowances are available; one for property and the other for miscellaneous trading income.
Inheritance Tax (IHT)
An individual can make gifts of up to £3,000, multiple smaller gifts of £250 or regular gifts out of their income each tax year – all exempt from IHT. This exemption can be carried over for one tax year only.
Gift Aid Donations
If you are a UK taxpayer and make a charitable donation via Gift Aid, the charity is able to claim an extra 25p for every £1 you give. As Gift Aid assumes that the money has been taxed at the standard rate, higher or additional rate taxpayers are eligible to receive a further 20% or 25% of the grossed up donation as a reduction in tax liability. So remember to record any Gift Aid donations on your tax return.
Other Tax Efficient Investments
There are other investment options that are time limited and have tax incentives such as Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Seed Enterprise Investment Schemes (SEIS).
In summary, as 5 April approaches (which is also Easter Monday, so the last working day of this tax year is actually Thursday 1 April), we would advise everyone to consider all the tax-saving and investment opportunities available to them. If you would like more information, a more detailed guide can be found here.
Please be aware that your capital will be at risk when you invest, and that you may get back less than you invested. This article does not constitute financial advice so before acting upon it, the reader should always take the appropriate financial advice.