With the end of the tax year in less than a month, many people including entrepreneurs, high-net-worth individuals, retirement planners and retirees will be thinking about getting their finances in check. The last year has certainly provided plenty of challenges, and although your finances may not have been at the forefront of your mind, it’s still worth taking some time to consider the tax planning opportunities that are available.
With that in mind, this checklist covers everything you need to consider before 6 April 2021 to put you and your family in the best possible position.
Key tax planning areas to consider
As well as optimising your tax planning for the current year (2020/21) it’s also important to take the time now to think about strategies to minimise tax for the year ahead (2021/22). Tax planning strategies usually are most effective when implemented before the tax year begins. The following are the key areas to consider.
Personal income of between £100,001 and £125,000 is taxed at an effective rate of 60% due to the loss of the personal allowance, while income over £150,000 is taxed at 45%. You should consider steps to reduce your taxable income to below these levels if you can, in order to avoid the higher rate of tax. Increasing your pension contributions might be an effective way to do that. Alternatively, you could consider:
- Transferring an income-generating asset to a spouse with lower income
- Deferring income to a later tax year
- Making Gift Aid payments
Other steps you can take to reduce your income tax liability include:
Capital Gains Tax
- Ensuring married couples / civil partners both have sufficient income to use their full personal allowance: £12,500 in 2020/21 or claiming the Marriage Allowance where it is not possible to redistribute income. If one spouse has income below the personal allowance level and the other is a basic rate taxpayer, the former can transfer 10% of their personal allowance to their spouse. The result will be tax relief of up to £250 for the current year. No tax is payable on transfers between married couples or civil partners, unless you are formally separated, in which case specialist advice is required. Replace investments that provide taxable income and gains with tax-free investments such as ISAs or investment bonds that allow valuable tax deferment.
- Redistribute investment capital between spouses / civil partners to reduce the tax incurred on income and capital gains. No tax is payable on transfers between married couples and civil partners.
Most individuals have a Capital Gains Tax allowance of £12,300 for the 2020/21 tax year. Any assets that are sold at a loss can reduce gains for the year or be carried forward and set against future capital gains.
Importantly, any of the annual exemption not used cannot be carried forward and will be lost. Assets can be transferred between spouses and civil partners tax efficiently to ensure both exemptions are used fully.
You can also choose to defer the Capital Gains Tax payment for a year by making a disposal after 5 April 2021. Alternatively, you can use two annual exemptions in succession making one disposal before 6 April 2021 and one just after.
Individuals have an annual tax-free gift allowance of £3,000. This can be carried on for one year but will be lost if it remains unused after that. If you have an annual exemption that you’ve carried forward from last year, it must be used before 6 April 2021.
Individuals can also make as many gifts of up to £250 per recipient as they like per tax year, free from Inheritance Tax (IHT). However, that only applies if the recipient has not received any part of your £3,000 IHT-free gift allowance.
Annual allowance for pension contributions
Investments in your pension are free from income tax and capital gains tax, but there is a limit to the amount you can pay in. The current standard tax-free pension allowance is £40,000 or 100% of earned income, whichever is higher. The carryforward rules allow you to make use of any annual allowances that were not used during the last three years. That makes 5 April 2021 the last opportunity to use unused allowances from 2017/18.
If your adjusted income ie your taxable income plus employer pension contributions, is over £240,000, your annual tax-free pension allowance falls away by £1 for every £2 of income. There is a minimum tax-free pension allowance of £4,000 for those with adjusted income of more than £312,000.
You can also pay up to £3,600 into a pension pot for your spouse, a civil partner or a child and benefit from basic rate tax relief on the contributions.
Savings and investments
- Ensure the savings income for both individuals in a married couple or civil partnership is sufficient to use their full £500 or £1,000 personal savings allowance and £2,000 dividend allowance.
- Shareholding directors of private companies can pay themselves up to £2,000 of dividend income for 2020/21 tax-free.
- If interest on investments or savings is due to be paid just after 5 April 2021, closing the account before the end of the tax year can bring the interest forward. That will allow you to use up any surplus personal savings allowance you have for the current tax year.
You should increase your savings if necessary to make the most of the £20,000 tax-free ISA allowance per person. Married couples can invest £40,000 over the year with no capital gains tax or income tax to pay. Any unused allowance cannot be carried forward.
Income tax relief is available to reduce your tax liability on the following investments:
- Venture Capital Trusts (VCTs) - Investments of up to £200,000 per year qualify for income tax relief at 30%. There’s no capital gains tax payable on any profit made when selling the investment and dividends are received tax-free.
- Enterprise Investment Scheme (EIS) - Annual investments of up to £1 million in qualifying companies attract income tax relief at 30%. If the investment is held for more than three years then any capital gain is free from CGT.
- Seed Enterprise Investment Scheme (SEIS) - Investments of up to £100,000 per tax year can be made in start-up companies that qualify for the SEIS. Income tax relief is available at 50%. No CGT is payable on disposal if the investment is held for more than three years.
Both EIS and SEIS investments can be carried back to obtain income tax relief available but not used in the 2019/20 tax year.
Additional tax planning areas to consider
While the points we’ve covered are likely to be relevant to most people, there are also some specific tax planning areas that may apply to others:
Trading and property allowances
Two £1,000 tax-free allowances are available, one for income from property and the other from trading and miscellaneous income. They can reduce your tax liability if you generate a modest income, for example, by renting out a room on Airbnb or selling items on eBay or Amazon.
If you have had to work from home due to Covid-19, you can claim tax relief
worth up to £125 for the additional household expenses incurred such as heating and business calls. Tax relief can also be claimed on your usual business expenditure such as professional subscriptions and business miles travelled in your own vehicle.
If you are thinking of switching to an electric car for business use, the tax benefits are well worth exploring. You will be able to benefit from capital allowances, car benefits in kind (determined by the vehicle’s CO2 emissions and fuel type) and zero tax on fuel benefits in kind.
Tick the box to say you are a UK resident and taxpayer when making Gift Aid payments and you’ll receive 20% or 25% of the donation as a reduction in your tax liability. To make the most of Gift Aid, the person with the highest tax rate in your family should ideally make the payment.
Your financial future is in safe hands
At Scrutton Bland ensuring that our clients and their families get the best outcome from their efforts is part of the process of providing clear and effective independent financial advice to help you maximise your wealth and make informed tax planning decisions.
Whether you are a business owner or private individual, making informed decisions and utilising the allowances available to you can make a dramatic difference to your wealth in the long-term. With tax and financial planning advisers waiting to work together on your behalf, the first step on this long-term relationship is to get in touch to arrange a free, confidential consultation at a time that works for you.