With spring just about in reach, the earth is full of promise as early bulbs peak through and we look forward to brighter skies; why not take the opportunity to get proactive and knuckle down on your finances? With the end of the tax year (5 April) also in sight, this is the ideal time to double check you’ve taken full advantage of all your annual allowances. So, to help you on your way, here is a handy reminder of some of your main tax planning opportunities:
Individual Savings Accounts (ISAs) – maximum annual contribution of £20,000 per adult
Junior Individual Savings Accounts (JISAs) – maximum annual contributionof £9,000 per child
Pensions – current Annual Allowance of £40,000. For every £2 of adjusted income over £240,000, an individual’s Annual Allowance is reduced by £1 (the minimum Annual Allowance is £4,000). The Lifetime Allowance places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money, the limit is currently £1,073,100. And don’t forget your children’s pension; the maximum annual pension contribution you can currently make is £2,880 which, along with tax relief, amounts to £3,600 a year
Making Inheritance Tax-free gifts – each financial year you can make gifts of up to £3,000 (in total, not per recipient) and if you don’t use this in one tax year, you can carry over any leftover allowance to the next year (some other exempted/small gifts allowable). To reduce the amount of IHT payable, many families consider giving their assets away during their lifetime. These are called ‘potentially exempt transfers’. For these gifts not to be counted as part of your estate on your death, you must outlive the gift by seven years, though taper relief may otherwise reduce the applicable IHT rate. If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income; advice is essential as strict criteria apply
Using your Dividend Allowance –for the current tax year, investors can earn up to £2,000 in dividend income tax-free. How much tax you pay on dividends above the Dividend Allowance depends on your Income Tax band (Basic rate 7.5%, Higher rate 32.5%, Additional rate 38.1%)
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) –these are traditionally higher risk investments but can offer up to 30% tax relief and provide portfolio diversification. EISs – maximum investment of £1 million (or £2 million as long as at least £1 million of this is invested in knowledge intensive companies) with 30% tax relief provided the investment is held for three years, gains are also exempt from CGT provided they have been held for three years. VCTs – maximum investment of £200,000 with 30% tax relief provided the investment is held for five years, gains exempt from CGT, conditions apply
Using Capital Gains Tax (CGT) allowance – every individual is entitled to a CGT annual exemption which is currently £12,300 (£6,150 for trusts). CGT is a tax on the profits you make when you sell something, such as a second home or a personal possession worth £6,000 or more, except for your car. You can’t carry forward this relief and so you may look to crystallise gains up to this amount before the end of the tax year. Capital losses can also be used to offset gains. Above the CGT allowance, basic rate taxpayers selling investments would pay CGT at 10%, with higher rate taxpayers paying at 20%. Spouses have two annual exemptions between them and can take advantage of the rules allowing assets to be gifted with no CGT implication until the asset is subsequently disposed of. Remember that genuine gifts from a spouse or civil partner do not count towards the allowance. Last year, Chancellor Rishi Sunak charged the Office for Tax Simplification (OTS) with carrying out a review of CGT, sparking speculation that the government is planning to increase the tax in a bid to refill its coffers following the pandemic; we will keep you up to date with any developments.
Your adviser is on hand to help
With the tax year-end imminent, please get in touch with us as soon as possible if you have any questions or want to discuss any aspect of your end of tax year planning. We look forward to hearing from you.
This year, the final day of the 2020/21 tax year falls on Easter Monday, so please don’t wait until the last minute to get your plans in order.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
Tax rates are based on current legislation for the 2020/21 tax year, which is subject to change
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