We should all be thinking about tax planning throughout the course of a year, but this year we have all been distracted with the impact of COVID-19 on our lives. With the 2020/21 tax year drawing to a close, now is a good time reflect on your short, medium and long-term strategy and to take advantage of tax planning opportunities that are available to you and your family.
We have detailed points to consider including those that are 5 April sensitive and a number of annual allowances available.
There are a number of different types of ISAs and they all grow income and capital gains tax-free and are not taxed when withdrawn.
Personal income between £100,001 and £125,000 is taxed at an effective rate of 60%; this is due to the loss of the personal allowance. Personal income over £150,000 is taxed at 45%.
Individuals may be able to reduce the income being taxed at these high rates of tax by taking advantage of the following:
Where personal income exceeds £125,000 after deductions for pension contributions and Gift Aid, individuals that manage their own companies may wish to consider accelerating income into the current tax year – up to the £150,000 additional rate threshold – to maximise use of the higher rate band.
The key about making Gift Aid payments is all about the tick box to say that you are UK resident and a taxpayer. The Gift Aid payment is then disclosed on your tax return and you will receive a further 20% or 25% of the grossed up donation as a reduction in your tax liability.
Ideally, the person in the family with the highest marginal tax rate should be making the Gift Aid payments.
How it works, you make a Gift Aid donation of £80 and tick the box. The charity receives your £80 and claims £20 basic rate tax from the government. The charity therefore receives £100 in total. The Gift Aid payment is disclosed on your tax return and if your marginal rate is 40% / 45% then the reduction in your tax liability will be £20 / £25. For a 45% taxpayer the donation has only cost £55.
All UK residents are able to contribute up to £3,600 gross, £2,880 net per year regardless of income. If aged over 75 then no tax relief is available.
However, the annual pension contribution capacity in 2020-21 is the lower of your relevant earnings and the annual allowance of £40,000 gross, equating to a £32,000 net payment.
If your adjusted income (generally, your total taxable income plus employer pension contributions) is over £240,000, then the annual allowance is tapered away by £1 for every £2 of income. There is a minimum level of £4,000 gross, £3,200 net for those with adjusted income in excess of £312,000.
It is important to review your pension contributions to see if there is scope to make additional contributions and utilise unused capacity brought forward from the three previous years. For more information please see our recent articles, COVID-19: The ‘high earner’ pension contribution conundrum and Pension contribution opportunities for Partners in professional practices.
Individuals have their own investment entitlement and income tax relief is available which will reduce your tax liability.
If you have capacity in the 2019-20 tax year the investments in both EIS and SEIS can be carried back and income tax relief obtained in the earlier year.
There is a personal savings allowance of £1,000 of tax-free interest for basic rate taxpayers, and £500 for higher rate taxpayers. This is a saving of £200 per person.
There is no allowance for those paying tax at 45%.
The first £2,000 of dividend income is tax-free. These allowances encourage families to structure their savings to utilise these allowances where possible.
Two separate £1,000 tax-free allowances are available; one for trading and miscellaneous income, and another for income from property. These allowances are designed to exempt modest amounts of income for example from sales on eBay, Amazon or Airbnb.
Where an individual rents out part of their only or main home, up to £7,500 of income from the letting will be tax-free due to availability of rent-a-room relief.
Where one spouse is a basic rate taxpayer, and the other has income below the personal allowance, the latter can transfer 10% of their personal allowance to their spouse resulting in tax relief of up to £250 in the current tax year.
Tax relief can be claimed on certain expenditure incurred in connection with your employment. This includes professional subscriptions, working from home allowance and business miles travelled in your own vehicle.
Employees should also review their tax codes to ensure that the correct allowances and deductions are included. If the tax codes in the current year are incorrect then an underpayment or overpayment may arise and be due following the end of the tax year, 5 April 2021.
The majority of individuals have an annual CGT allowance of £12,300. Therefore capital gains on investments up to this amount are tax-free before the 6 April 2021.
One way of utilising the allowance is to sell and then buyback stocks and shares. This provides an opportunity to increase the base cost for future sales. The repurchase will need to be delayed for more than 30 days or made by your spouse, civil partner, or ISA to benefit from this.
Assets with a loss can also be sold to reduce capital gains in the same tax year or they can be carried forward and set against future capital gains.
An individual can make an annual gift of £3,000 IHT-free. This provides parents (and grandparents) with an opportunity to make tax-efficient gifts.
Individuals can also make as many small gifts of £250 per person as they like per tax year. This provides the opportunity of gifting £250 to each child or grandchild each and every tax year IHT-free.
Regular gifts from disposable income may also be made IHT-free. Great care however needs to be taken to ensure that the gifts are habitual in nature and are out of income which is in excess of regular expenditure. This is a complex area and advice should be sought.
Taking advantage of year-end tax planning should only be part of your overall tax planning strategy. Tax planning is all about putting into place a strategy which provides the right structure and security of your financial affairs. Your strategy should evolve and develop with time and enables you to plan for the future.
For more information on how you can make the most of your tax planning opportunities please speak to your usual Crowe contact.