Paul Haywood-Schiefer, Senior Manager at the firm highlights that: “Having paid what they owe to the tax man, many people forget that the end of the tax year is when they need to pay attention to getting their affairs in order for the future and claiming what they are entitled to.”
“If you are a taxpayer then planning for the future should be an important part of what we all do, and there are several things to be remembered and acted upon.
“Remember your tax-free allowances. The first £12,570 of income is covered by your Personal Allowance and received tax free (unless your total income exceeds £100,000). A further £2,000 of dividend income is covered by a Dividend Allowance (if not already covered by the Personal Allowance) and there is no tax to pay. For Basic rate and Higher rate taxpayers, they can also benefit from the Personal Savings Allowance, which means the first £1,000/£500 (respectively) of interest again is free from tax. Although you might not be able to do much about influencing when interest or dividends are paid, don’t forget these exist when preparing your tax return.
“Utilise the Capital Gains Tax Annual Exempt Amount. In the same way as you have tax free allowances on the dividends and on savings, you can receive £12,300 of capital gains completely tax free. Therefore, you might want to use this to then re-invest the gain.
“If you don’t have gains, you could think about crystalising a loss. While a tax-free amount of gains is great, if your portfolio is not performing, and you have shareholdings sitting at a loss, you could also consider crystalising capital losses, i.e. selling stocks at a loss to lock in (crystallise) that loss to then carry forward against future gains. Crystalised capital losses act differently to in-year losses, which are immediately set against any gains, regardless of the fact that you have a Capital Gains Tax annual exempt amount (even to the point of wasting it). Where a person has losses crystalised from an earlier year they will only ever reduce your gains to a maximum of the annual exempt amount so as not to waste any of it, even if they exceed this. The unused losses will then be carried forward again to offset against future gains.
“There are other ways to get your affairs in order such as using your ISAs. Make full use of the annual limits for contributions to your ISAs. The growth and income within these are completely tax free. The annual maximum amount that can be saved in ISAs is £20,000 (though a Lifetime ISA has a maximum of £4,000 allowed, which uses part of your overall ISA allowance) in a combination of ways through both stocks, shares, innovative finance, or cash.
“You can also make personal pension contributions. The amount you can put in will depend hugely on the amount of your yearly income, what that income is and what unused allowances you have from the three prior tax years. As a minimum, a person can make pension contributions up to £3,600 (gross) in the year and you have an annual allowance up to £40,000 (if your income allows). Why making pension contributions is so beneficial from a tax perspective is twofold. The contributions you make to your personal pension fund are considered to be made net of basic rate tax and so the pension fund will claim the excess from the Government, i.e. you contribute £2,000 personally and the pension fund would claim an extra £500 from the Government (2,000 x 100/80 = 2,500). Further to this, higher and additional rate taxpayers can claim tax relief on the contributions through their tax returns, extending their basic rate tax band and giving relief up to 20%/25% (respectively) on the amount of the gross contribution.
“Making charitable donations under the Gift Aid scheme to worthy causes is not just beneficial to the charity in question, it can also help reduce your tax bill. As with pension contributions, the tax benefits are the same. This time however, though they are deemed to be made net of basic rate tax, the charity will claim the extra 20% from the Government. Higher and Additional tax rate payers can then also benefit from their Basic Rate tax bands being extended by the amount of the gross donation as mentioned above. Care must be taken in relation to Gift Aid donations to ensure that you have paid sufficient tax to HMRC to have franked the donation, otherwise, you will pay the tax the charities claim via your tax return.
“Note also that additional personal pension contributions and/or Gift Aid donations will also reduce a person’s ‘adjusted net income’ so there may be a benefit for those individuals whose income is between £100,000 and £125,140 where the Personal Allowance is reduced or for those with income between £50,000 and £60,000 who are subject to the High-Income Child Benefit Tax Charge. Again, in relation to pension contributions, you need to ensure you will not exceed the annual allowance, including any available carried forward amounts.
“If within your power to do so, you could think about accelerating dividend payments. As well as using your Dividend Allowance, where possible, and in advance of the introduction of the new Health and Social Care Levy of 1.25% due to apply to dividends from 6 April 2022, make dividend payments now. However, remember to do your sums first as you need to take care if moving into a higher tax bracket by doing so, particularly if the amounts will push the individual over £100,000 (i.e., to the point where the personal allowance is reduced).
“Another consideration is accelerating employee bonus payments. For employers, where possible, in advance of the introduction of the new Health and Social Care Levy of 1.25% (payable by both the employee and employer) it might be worth accelerating bonuses that might otherwise have been paid shortly after the end of the tax year. Whether the individual receiving it is happy or not, might depend on whether that bonus again takes them over thresholds that mean the benefit of the Health and Social Care Levy saving on the accelerated bonus is outweighed by the loss of Personal Allowance or are pushed into the High-Income Child Benefit Charge. So be careful.
“You can utilise your annual gift allowances for IHT purposes. You have a general allowance of £3,000 of gifts per annum that will not be added back to your estate on death. In addition, you can give as many small gifts of £250 or less, per gift recipient, per annum (you can’t just give one-person endless gifts of £250, it’s one per person) which will also fall out of your estate.
“You can also consider making a tax efficient investment. If you know you are going to have a large tax liability for the year, you might consider investing in an EIS (Enterprise Investment Scheme), VCT (Venture Capital Trust) or an SEIS (Seed Enterprise Investment Scheme). Each have their own limits, requirements, and different tax reliefs. With SEIS, it is possible to get up to 50% Income Tax relief on the value of your investment (to a maximum investment of £100,000 pa), you can also use the reinvestment relief here to get 50% of the value of funds reinvested into the SEIS, to exempt capital gains of an equivalent amount. VCT and EIS investments both give Income Tax relief at 30% (subject to maximum investments of £200,000/£2,000,000 respectively). Whilst EIS does not allow a Capital Gains Tax exemption, it does allow for a deferral of capital gains that are reinvested into EIS shares (VCT does not offer this). Though a deferral may seem attractive at first sight, when the EIS shares are sold or if the investment ceases to qualify before the three-year holding period is up, the gain will crystallise and will be taxable at the tax rates of the day. At present time, Capital Gains Tax rates are relatively low, and the Office of Tax Simplification has suggested aligning these with Income Tax rates, which might mean when the gain crystallised, the deferred tax might be higher than what would be currently payable. For EIS/SEIS/VCT investments, the actual gains on those shares will be exempt, so long as the shares have been held for the requisite holding periods to achieve this.
“Investment decisions should never just be made on the basis of tax, however. Before undertaking any of these you must consider your overall position, and which of these will be beneficial to you, and which will not.”
If you would like to discuss any of the above, please get in touch with your usual Blick Rothenberg contact, or Paul Haywood-Schiefer using the details on this page.
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