I don’t know about you but, for me, the start of the year is where I look at my finances in detail. I look at where I can cut back and try to set some saving goals. This continues into February as the end of the current tax year is looming and therefore clients often wish to know what they can do to help their tax position. I thought it would be useful to set out a number of ideas for you in case you can take advantage of them.
The suggestions in this article give you an overview of what things you should consider as part of your year-end tax planning review. For more information, please do not hesitate to pick up the telephone or drop me an email if you have any questions or wish me to advise in more detail.
1. Preserving the personal allowance
If you earn just over £100,000 a year, you may be aware that your personal allowance (currently £12,750) is phased out on income between £100k and £125k. That’s an effective tax rate of 60%! But you can use pension contributions and qualifying charitable donations to reduce your taxable income. Therefore, if you are earning up to £120k and have the cash available it’s definitely worth considering.
2. Preserving your family’s entitlement to Child Benefit
Likewise, if you earn between £50,000 to £60,000 and claim child benefit. You will be subject to the Child Benefit Tax Charge and a self-assessment tax return would need filing to report this liability.
Again, pension contributions and charitable donations can be used to bring down your taxable income and therefore I would encourage you think about making these before the end of the tax year.
3. Using and not losing tax free allowances
Every UK individual has an annual exemption for capital gains tax of £12,300. Therefore, if you have assets or investments which have increased in value since you purchased them, you could consider selling them to realise a tax-free profit.
There are however anti-avoidance rules if shares are bought back the same day or in the following 30 days. The sale would be matched to the later purchase when assessing the tax position.
4. Making a gift of an asset to a spouse or civil partner before selling
If your spouse or civil partner has their annual exemption for capital gains tax available and/or is a lower earner it may be beneficial to transfer an asset, in whole or in part, you are selling to them before sale.
This is because any transfer between spouses and civil partners are transferred at no gain/no loss. The acquiring spouse or civil partner assumes the transferors purchase price.
5. Claiming old capital losses
If you have previously disposed of (ie sold or gifted) an asset which has decreased in value and therefore you made a loss, these losses should be claimed so that they can be used later on.
Capital losses must be claimed within four years of the end of the tax year in which they are realised, meaning capital losses realised in 2017/18 must be claimed by 5 April 2022.
Usually capital losses are recorded on your tax returns in the year they arose, but you may wish to check that this was done at the time.
It may also be possible to claim a capital loss on assets or investments which are now worthless, and/or loans to trading companies which have become irrecoverable.
6. Other exemptions and allowances
£3,000 inheritance tax annual exemption Individuals wanting to reduce their estate to reduce or avoid the tax burden on death should consider using all available exemptions and this is one of them.
An individual can give away £3,000 a year and the gift is out of their estate straight away. If cash gifts to individuals exceed that amount, the donor must survive seven years for the gift to not be caught by inheritance tax.
In this case, if you don’t use the exemption in one tax year, you can use it in the next tax year. This means that you could give up to £6,000 in the later year. Other reliefs and exemptions are available.
Stakeholder pensions of £3,600 per year*
Any UK resident individual under the age of 75 can pay £2,880 into a stakeholder pension and the UK government will contribute the rest to make it a £3,600 gross contribution.
This applies to children and any non-earning individuals but of course the pension fund will not be accessible until the minimum pension age which is currently 55 years old.
Individual Savings Accounts (ISAs)* In 2021/22 the maximum investment into an ISA is £20,000. This can then be invested in cash, stocks or shares or other permitted investments. Income tax and capital gains tax do not apply to investment returns and therefore makes this investment option very tax efficient.
For Junior ISAs which are available to children under the age of 18 the annual subscription limit for 2021/22 is £9,000 but any funds invested are locked in until the child turns 18.
Tax efficient investments* There are several other tax efficient investments such as the Enterprise Investment Scheme (EIS), Seed EIS and Social Investment Tax Relief (SITR), to name a few, which can bring significant income tax relief and capital gains tax benefits.
For instance, you could invest in an EIS company and enjoy income tax relief of 30% of the amount invested subject to annual limits of investment.
If you would like assistance with your year-end tax plans, please do get in touch on 0116 216 7681 or email me at email@example.com.
*For these areas I recommend you seek independent financial advice. I work very closely with various financial advisers and would be happy to point you in the right direction should you have a sum to invest.