Year-end tax planning opportunities for individuals

We should all be thinking about tax planning throughout the course of a year, but this year you may understandably have 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 to remind you of the tax advantageous opportunities for your short, medium and long-term investment plans.

We have suggested below opportunities that you might like to consider, including those that are 5 April sensitive, and those where annual allowances are available.

Individual Savings Accounts (ISAs)

There are a number of different types of ISAs available in the market, and they all receive income and capital gains without any liability to tax.

  • ISA: You are able to invest up to £20,000 per tax year into an ISA if you are UK resident and aged 18 or over.
  • Junior ISA: You are able to invest up to £9,000 per tax year, per child, providing a great opportunity for parents or grandparents to save for a child’s future.
  • Lifetime ISA (LISA): Up to £4,000 of the £20,0000 ISA limit can be invested into a LISA.  LISAs are only available for those aged between 18 and 40 at the time that the account is opened but investments can be made into the ISA until you are aged 50.  In addition to the usual ISA tax benefits, a LISA will receive a bonus of 25% of that year’s contributions.  In order to retain the bonus, the LISA must be used to purchase either a first home, or be withdrawn after the age of 60.

Income tax planning: pensions and charitable giving

Personal gross income received in the band between £100,001 and £125,000 is taxed at an effective rate of 60%; this is due to the loss of your personal allowance.  Gross personal income over £150,000 is taxed at the rate of 45%.

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 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 donations, 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 the use of the higher rate band.

Pension contributions

All UK residents are able to contribute up to £3,600 gross, £2,880 net, into a pension each tax year and obtain tax relief for the investment, regardless of the level of their income, unless you are over the age of 75.

However, the maximum annual pension contributions that attract tax relief is the lower of your earnings or £40,000 gross.  This means that if a net contribution of £32,000 is invested into a pension, the pension Trustees are able to recover £8,000 in tax relief from the Government, which is added to your pension fund at no cost to yourself.  If you are able to sacrifice some of your salary in exchange for a contribution into your pension, this would allow you to reduce your personal tax and national insurance liability by at least 32%, because not only are you able to receive basic rate tax relief of 20%, you will also receive a reduction in your national insurance liability of 12%.

It is important to review your pension position to establish whether there is scope to make additional contributions and utilise unused capacity brought forward from the three previous tax years.  If you have utilised all of your own pension tax relief, you might wish to consider whether investments should be made into the pensions of other family members, in order to make full use of the tax reliefs available.

Venture Capital Trusts (VCTs)

VCT Investments up to an annual maximum of £200,000 qualify for income tax relief at the rate of 30%.  Dividends received from your investments are tax-free.  There is no Capital Gains Tax (CGT) payable on any gain made provided that the VCT shares are sold more than five years after their purchase.

Savings and dividend allowances

The first £1,000 of interest received from your investments is free of liability to tax for basic rate taxpayers; the limit is reduced to £500 for higher rate taxpayers.

The first £2,000 of dividend income is tax-free.

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

Trading and property allowances

Two separate £1,000 tax-free allowances are available; one for trading and miscellaneous income, and another for income from property rentals.  These allowances are designed to exempt from tax 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.

Marriage allowance

Where one spouse is a basic rate taxpayer, and the other has income below the level of the personal allowance (currently £12,500 per annum), 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.

Employment

Tax relief can be claimed on certain expenditure incurred in connection with your employment.  This includes professional subscriptions, working from home allowances 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 for the current year are incorrect, an underpayment or overpayment of tax may arise and be due for payment following the end of the tax year, 5 April 2021.

Capital gains

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 of the shares thereby reducing the capital gains tax payable on the further sale of the shares in the future.  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 tax advantage.

Assets that are currently standing at a loss can also be sold to reduce capital gains on the sale of other assets in the same tax year, or they can be carried forward and set against future capital gains.

Inheritance tax (IHT)

An individual can make annual gifts totalling £3,000 free from all liability to IHT.  This provides parents (and grandparents) with an opportunity to reduce the value of their estates for IHT purposes.

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.

Additional matters to consider

  • Do you have sufficient life assurance cover?
  • Do you have critical illness cover?
  • Do you have income protection?
  • Is your estate efficient for IHT purposes? We can work with you to minimise your potential IHT exposure.
  • Is your Will up to date? We can help you to ensure your Will is IHT efficient.
  • Do you have a lasting power of attorney (LPA) in place?
  • Do you have a “death box” with details of where your financial information is held?
  • How will your family deal with your internet and social media accounts in the event of illness or death?

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 for your financial affairs.  The strategy should evolve with time and enables you to plan for the future ; we will review the options open to you at each review meeting.

For more information on how you can make the most of your tax planning opportunities please speak to me or my colleagues James Burnett and Karen Best.  James is also a Chartered Accountant with 20 years’ experience of advising businesses and personal clients and is a qualified IFA.  Karen is a Chartered Tax adviser with 30 years’ experience of tax planning for individuals, companies and trust funds for clients based both in the UK and overseas.

I hope that you will find the reminder above useful.

Kind regards

Posted in Blog, Wealth Management News.