There has been much speculation around what Chancellor Rishi Sunak’s second budget on 3rd March may have in store for us.
The Chancellor himself indicated that he would tell us more about “the next phase of his plan to tackle Coronavirus and protect jobs.”
It is also widely anticipated that Chancellor Sunak may increase taxes given government borrowing has reached levels never seen in peacetime.
The opposing argument is that the Budget falls at a difficult time for the UK, making it too soon to increase the tax burden. A focus of creating jobs to boost the UK economy and increase profitability may mean substantial reforms to taxation are on hold for now.
Rather than investing energy speculating about the Budget, our priority is to ensure you have taken full advantage of the financial planning opportunities that are currently available.
For some, the lockdowns of the last 12 months have limited our opportunities to spend, increasing cash savings, presenting a chance to invest.
Below we highlight eight planning ideas for you to benefit from current allowances, reliefs and exemptions.
Income Tax
- Most people start with a personal allowance of £12,500 for the tax year (6th April 2020 to 5th April 2021). This is the amount of income you can receive before you pay income tax. For those in retirement, it is important to consider using your personal allowance to draw income from your taxable assets if your personal allowance is not being used by other income. For example, you may have a State Pension or occupational pensions that start paying you an income in a few years, but a private pension you could draw on sooner. This could utilise your personal allowance and save you the income tax you otherwise would have paid in the future.
- Making a pension contribution reduces the amount of tax you pay as you receive tax relief on any contributions you make. This is at the highest rate of income tax that you pay. For every £80 contribution to a pension, a basic rate taxpayer will receive £20 tax relief, a higher rate taxpayer will receive £40 and an additional rate taxpayer will receive £45.
Current pension contribution limits provide tax relief on contributions up to the lower of 100% of your earnings or £40,000 per annum, with the possibility of carrying forward any unused allowance from the previous three years if you were a member of a pension scheme for those three earlier years.
As a business owner, you have the option to make your pension contributions from your limited company, reducing your corporation tax bill.
- Last year’s Budget brought changes to pension contribution limits. The adjusted income threshold for reducing contribution limits was increased from £150,000 to £240,000, opening the opportunity for some to increase their pension contributions this tax year.
- If you are married, it’s important to look at your financial arrangements in totality, ensuring you have maximised your personal, dividend, savings and marriage allowances. Remember assets can be transferred between spouses free of Capital Gains Tax (CGT), which creates many more tax planning opportunities.
Capital Gains Tax (CGT)
We currently each have an annual CGT allowance of £12,300. Thereafter you pay 10% tax on any gains that fall into basic rate tax, and 20% tax on any gains in the higher rate tax band. These figures increase to 18% and 28% respectively for gains relating to property assets.
With these rates being so much lower than the corresponding rates for income tax, it’s easy to see why there has been so much talk of equalising them. But there is a question over whether this will reduce tax revenues as people may be inclined to hold onto assets rather than sell them.
Another option could be a significant reduction to the annual CGT allowance or to introduce a minimum period that an asset needs to be held by an investor before it can be sold to benefit from the £12,300 allowance.
- If you are intending to dispose of an asset with a taxable gain liability soon, we would consider doing so in the next few weeks if that’s possible. Deferring the sale until a future date may mean incurring an increased tax liability. However, it’s important to emphasise that this only makes sense if you were planning to dispose of the asset shortly anyway, rather than this being an approach purely for tax planning reasons.
- As already mentioned, transfers of assets between spouses are exempt from CGT. This means an asset held by one person, could be held jointly to utilise both allowances of £12,300. Alternatively, if the gain takes you over the allowance, transferring the asset to the lower taxpayer could mean paying 10% CGT rather than 20%.
One important point is that if you sell an asset to realise a capital gain, you must not buy it back for a period of at least 30 days. If you do so, the effect will have been to reinstate the gain from the original date of purchase.
- Remember to use your £20,000 ISA Allowance as this can save you both Income and CGT in the future. This is a ‘use it or lose it allowance’ so can’t be carried forward to combine with the allowance for the next tax year, if you don’t use it.
Inheritance Tax (IHT)
The OTS (Office of Tax Simplification) have made some suggestions to ‘simplify’ the current inheritance tax regime. It remains to be seen when these will be implemented, but in the meantime, it’s important to take the opportunities available to you in the current system, if reducing your IHT exposure is a priority.
- Have you used your £3,000 annual gift exemption? You can carry any unused exemption forward to the next year, but only for one year.
In the event of a wedding or civil ceremony, you can gift up to £1,000 per person, increasing to £2,500 for a grandchild or £5,000 for a child.
You can make gifts from your income, but you must be able to evidence that the gifts don’t impact your ability to maintain your standard of living. Making these gifts on a regular basis helps evidence the case for this. If these criteria are met, there are no limits on the amount that may be gifted.
You can make as many gifts of up to £250 per person as you would like during the tax year if you haven’t used any of the above exemptions for the same person.
Tax planning is a complex area and there are several pitfalls to avoid. Working with a financial planner can help you navigate the ever-changing financial landscape, ensuring you don’t spend your hard-earned wealth on taxes that can be legitimately avoided using a combination of the allowances available.
All ideas and suggestions are based on current tax rules and you will need to carefully consider your financial circumstances to determine whether they are appropriate.