As we approach the end of the 2021/22 tax year, there’s much speculation about what Rishi Sunak could announce in his Budget on 23 March.
Much has been written about the impact the pandemic has had on the UK and world economy, and the challenges that rising inflation may bring. But rather than jump on the speculation bandwagon, our priority is to focus on the things we can control and ensure you take full advantage of the financial planning opportunities available before the tax year end.
We’ve put together some planning ideas which, if relevant to you and correctly utilised, can allow you to make the most of current allowances and exemptions. This is something we do with our clients each year to ensure their money is working as hard as possible for them.
Income Tax and making the most of your allowances
The Personal Allowance – the amount you can earn before you need to pay Income Tax, is £12,570 for this tax year (6 April 2021 – 5 April 2022).
If you’re retired and not already using your full Personal Allowance, this could present a great opportunity to reduce your future tax bills by drawing an income from your taxable assets.
If your State or occupational pensions aren’t due to start paying an income for a few years and you have a private pension that offers the option, you could start drawing it earlier. Meaning you could use your Personal Allowance to avoid paying Income Tax that would be due if you took that income in the future.
If you’re a basic-rate taxpayer who’s married or in a civil partnership and you’re not using your full Personal Allowance, you can transfer up to 10% (£1,260) of your Personal Allowance (depending how much unused allowance you have left) to your spouse or partner each tax year.
The Personal Allowance is gradually withdrawn for people with income above £100,000. This is costly as it means that any income between £100,000 and £125,140 is effectively taxed at 60%. However, it’s possible to make a pension contribution to restore some or all of your Personal Allowance.
The Personal Allowance is frozen until 2026, so utilising available opportunities to reduce your Income Tax bill over the coming years is more important than ever.
Make the most of the tax-saving benefits your pension can bring.
You’ll receive tax relief on any contributions you make to your pension. The amount of relief you receive is based on the rate of Income Tax you pay.
For example, if you’re a basic-rate taxpayer, to increase the value of your pension by £100, you would need to contribute £80. You’d receive the other £20 in tax relief from the government, which is equal to the Income Tax you would otherwise have paid.
For a higher-rate taxpayer, putting £100 into your pension would cost only £60, or £55 for an additional-rate taxpayer.
You’ll get Income Tax relief on the money you put into your pension up to a maximum of your earnings capped at £40,000 each tax year. The longer your money is invested, the more it can benefit from compounding and long-term investment growth. This could add a significant amount to your total pension pot over the long term.
If you’re a business owner, diverting your limited company’s pre-tax profits into a pension could reduce your Corporation Tax cost significantly and give an opportunity to make contributions greater than the £40,000, depending on your previous year’s pension contributions.
Although, it’s important to keep in mind the Lifetime Allowance. This is the total amount you can build up in pension benefits over your lifetime, before incurring a Lifetime Allowance tax charge. The chancellor announced last year that this was frozen at £1,073,100 until 2026.
Savings and investments opportunities
Any unused allowance for ISAs cannot be carried forward to the next tax year.
You can save up to £20,000 in an ISA in the 2021/22 tax year. This is an individual allowance, so if you have a partner, you can both maximise the money you put into your ISAs.
If you have children or grandchildren under the age of 18, they have a £9,000 Junior ISA (JISA) allowance, which you could use to pass money on tax-efficiently and help contribute towards their future.
Capital Gains Tax (CGT)
You’re liable for CGT when you sell an asset for a profit. This could be a second home or investment property, a shareholding in a company or other valuable objects.
Currently, there’s a tax-free allowance of £12,300. You can’t carry any unused allowance to the next tax year – so it’s another “use it or lose it” opportunity.
Because there’s no capital gains liability for transfers between spouses, it’s possible to redistribute assets to minimise the tax payable.
For example, if you’re a higher-rate taxpayer and your partner is a basic-rate taxpayer, and your gains exceed your tax-free allowance, you could transfer the asset to them prior to selling, potentially reducing your CGT to 10% rather than 20%.
Any gains above the CGT allowance will be charged at 10% if they fall into basic tax, and 20% for gains that fall into the higher- or additional-rate tax band. It’s worth noting the rates are higher for gains relating to property assets (18% basic, 28% higher rate).
With liquid assets, such as shares, you could opt to sell some of your holding in the current tax year and some in the subsequent tax year – making use of two years’ CGT allowances. However, caution should be taken with this approach as the tax rules could change at any time. It’s also harder to apply this principle to illiquid assets, such as property and physical items.
Don’t forget that you can offset losses against gains, and even if you don’t have the option to use them to offset gains this tax year, they can be registered with HMRC to offset gains in the future.
Inheritance Tax (IHT) – reducing your exposure
Using your annual IHT gift exemption of £3,000 each year can help to reduce the taxable value of your estate.
Unlike many allowances, if you didn’t make full use of this in the previous tax year, you can carry it forward for one year if you’ve already used the current year’s allowance. This is an individual allowance, so if you’re gifting as a couple you could double up and gift £6,000 a year tax-free.
There are other annual tax-free gift allowances you can make use of, such as helping towards the cost of a wedding. And, if you support a good cause with a charitable gift, it can also help to reduce your rate of IHT.
Making a substantial gift during your lifetime can be a great way to see your loved ones enjoy the benefits of your wealth. Calculating the amount you can gift without incurring a lifetime tax charge is complex and needs to consider any gifts you’ve given previously.
Tax planning is complex, but if you get it right it can help you retain more of your hard-earned wealth.
If you’d like more information about how you can make the most of tax planning opportunities and annual allowances, please contact us at firstname.lastname@example.org or call 01202 025481.
All suggestions are based on current tax rules, and you will need to carefully consider your own financial circumstances to determine if they are appropriate for you.