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Tax planning opportunities for individuals

Nicky Owen, Partner, Professional Practices
23/11/2021
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In an ideal world we would all be making use of tax planning opportunities throughout the course of a year. In reality, we have to stop and actively make time to reflect and work out what tax planning opportunities we can utilise.

With 2022 fast approaching and the tax year end, 5 April on the horizon, now is a good time to stop and work out what actions are required to make use of the relevant tax planning opportunities that are of interest to you and your wider family.

What do you need to consider?

  • Think about you and your family.
  • Think about your short, medium- and long-term strategies.

 

  • Make use of the annual allowances before the 5 April.
  • Make use of tax reliefs to minimise your tax position.

Gift Aid payments

Ideally, the person in the family with the highest marginal tax rate should be making the Gift Aid payments.

When making donations there are two things to remember:

  • tick the box to say that you are UK resident and a taxpayer
  • record the payment so that it is included with your personal tax return information, to ensure that if appropriate, you will receive the higher rate tax relief on the payment.

Why make donations under Gift Aid?

Quite simply both you and the charity benefit.

  • The charity is able to claim back basic rate tax from HMRC.
  • If you are paying tax at a higher rate than 20%, then you will receive additional tax relief.

See our article How to make festive donations via Gift Aid for more information.

Pension contributions

The benefits of making a pension contribution are:

  1. The pension scheme is able to claim back basic rate tax from HMRC.
  2. If you are paying tax at a higher rate than 20%, then you will receive additional tax relief.
  3. You are building a pension pot to use in your retirement or pass to future generations.

How much can you contribute?

  • The annual pension contribution capacity in 2021-22 is the lower of your relevant earnings and the annual allowance of £40,000 gross, equating to a £32,000 net payment.
  • All UK residents under 75 are able to contribute up to £3,600 gross, £2,880 net per year regardless of income.
  • 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, £3,000 net for those with adjusted income in excess of £312,000.
  • If you are aged over 75 then no tax relief is available on the contributions made.

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.

Income tax planning: pensions and charitable giving

Personal income above between £50,271 and £150,000 is taxed at 40%.

Personal income over £150,000 is taxed at 45%.

However, there is a band of income between £100,001 and £125,000 that suffers an effective rate of 60%; due to the loss of the personal allowance.

Individuals may be able to reduce the income being taxed at these high rates of tax by taking advantage of the following:

  • passing income yielding assets to a spouse or partner with lower income
  • deferring income to a later tax year
  • making pension contributions
  • making Gift Aid payments.

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.

Tax efficient investments

There are generic tax efficient investments that individuals are able to investment in where income tax relief is available which will reduce your tax liability.

Venture Capital Trusts (VCTs)

  • Investments up to an annual maximum of £200,000 qualify for income tax relief at 30%.
  • Dividends received are tax-free.
  • There is no Capital Gains Tax (CGT) payable on any gain made when sold.

Enterprise Investment Scheme (EIS)

  • Investments in qualifying companies up to an annual maximum of £1 million attract income tax relief at 30%.
  • This limit is increased to £2 million where investments over £1 million are invested in knowledge-intensive companies.
  • If the investment is held for more than 3 years than any capital gain generated is exempt.
  • Relief from CGT is available where an amount up to the level of the capital gain is reinvested in a company qualifying for EIS.
  • The original capital gain is deferred until the EIS shares are sold. At which point the capital gain comes back into charge and is taxed at the prevailing rate.

Seed Enterprise Investment Scheme (SEIS)

  • An individual can invest up to £100,000 per tax year in start-up companies that qualify for the SEIS.
  • Income tax relief is at 50% of the investment.
  • If the investment is held for more than three years than any capital gain generated is exempt.
  • Reduce capital gains in the year by up to 50% of the SEIS investment.
  • If you have capacity in the 2020-21 tax year the investments in both EIS and SEIS can be carried back and income tax relief obtained in the earlier year.

Crystallising capital gains and losses

  • Are you generating capital gains and making use of the annual Capital Gains Tax allowance of £12,300before 6 April 2022?

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.

  • Do you have the ability to crystallise a loss to reduce capital gains in the tax year or to be carried forward and set against future capital gains?

1Not available to those taxed on the remittance basis with income and capital gains above £2,000.

Inheritance tax (IHT)

IHT-free planning opportunities to take advantage.

  • An annual gift of £3,000 - This provides parents (and grandparents) with an opportunity to make tax-efficient gifts.
  • Small gifts of £250 per person as many as you care to make per tax year -This provides the opportunity of gifting £250 to each child or grandchild each and every tax year.
  • Regular gifts from disposable income - 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. These gifts could include making the following for children/grandchildren:
  • pension contributions
  • ISA subscriptions
  • university fees
  • accommodation costs
  • family holidays.

This is a complex area and advice should be sought.

Individual Savings Accounts (ISAs)

Are you making the most of the different types of ISAs that are available to you and your family?

The income and capital gains generated is tax-free and they are not taxed when withdrawn.

They can be used by parents or grandparents to transfer funds to future generations and assist children to save for their future, for their education, or a future home.  

ISA  An annual allowance of £20,000 can be invested by UK residents over 18 
Junior ISA An annual allowance of £9,000 can be invested per child.
Help-to-Buy ISA: Can save up to £200 per month.
A 25% tax-free bonus, capped at £3,000 is added when the funds are used to buy a first home.
Closed for new applicants.
Lifetime ISA (LISA): Up to £4,000 of the ISA limit (above) can be contributed.

This is only available for those aged between 18 and 40 at the time of opening the account. Contributions can be made up until the age of 50.
A bonus of 25% of that year’s contributions is added on each contribution.
The bonus is only retained if the LISA is used to:

check_circle_24px  purchase a first home, or

check_circle_24px  withdrawn after the age of 60.

Savings and dividend allowances

These allowances encourage families to structure their savings to utilise these allowances where possible.

Taxpayer  Savings Allowance  Dividend Allowance
   Allowance Tax Saving   
Basic rate £1,000  £200 £2,000
Higher rate  £500  £200 £2,000
Additional rate £0  £0  £2,000

Trading and property allowances

These are 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.

If you rent out part of your main residence, up to £7,500 of income from the letting will be tax-free, if rent-a-room relief is claimed.

Marriage allowance

Where one spouse/civil partner 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/civil partner resulting in tax relief of up to £252 in the current tax year.

Employment

Tax relief can be claimed on certain expenditure incurred in connection with your employment. This includes:

  • professional subscriptions
  • working from home allowance
  • 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 may arise and be due following the end of the tax year.

Additional points to consider

  • Do you have sufficient life assurance cover?
  • Do you have critical illness cover?
  • Do you have a lasting power of attorney (LPA) in place?
  • Is your Will up to date? We can help you to ensure your Will is IHT efficient.
  • What is your IHT exposure? Use our IHT calculator to find out more. 
  • Is your estate efficient for IHT purposes?
  • Do you have income protection?
  • Do you have a “death box” with details of where your financial information is held?

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.

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We provide tax advice to individuals and partners and understand and appreciate that taking time out to consider and take advantage of planning opportunities is not always high on the agenda. We are here to guide and advise you.
Nicky Owen
Nicky Owen
Partner, Professional Practices
London