With precious little time left before the tax year ends on April 5th, now is the time to consider your tax planning to maximise on allowances, reliefs and exemptions for the current tax year. Some of these substantial opportunities will be lost if not used before the end of the tax year.
Here are our top tips to catch those valuable savings before time runs out.
Maximise your Individual Savings Account (ISA)
The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple could put away £40,000 before the 5th April. This can be paid into either a Cash ISA, a Stocks and Shares ISA or a combination of the two.
ISAs are free of Capital Gains and Income Tax, and no need to declare this on your tax return. Therefore, your full ISA allowance should be used as a priority each year as it’s one of the most tax-efficient ways to
save. If you do not make use of your ISA allowances, they cannot be carried forward to the new tax year. Use it or lose it.
Save for your children
If you have children or grandchildren, a Child Trust Fund can save up to £9000. Alternatively, the Junior Individual Savings Account (JISA) is worthy of consideration for the same tax benefits as an adult ISA. For new subscriptions to a Junior ISA (JISA), the allowance for the 20/21 tax year is £9000.
You can pay into a JISA on behalf of your child up to age 18, but your child can take control of the account at 16. No withdrawals are allowed before 18, however. Again, if you don’t use the full JISA allowance in the tax year, the remainder does not roll over and will be lost. The better JISA providers will allow multiple contributors, so it’s a great way for grandparents to help out
Top up your pension
There are limits to the amount you can tax-efficiently pay into your pension. Known as the Annual Allowance, it’s currently set at the equivalent of your relevant taxable income that year, up to a maximum of £40,000. However, for high earners, the Annual Allowance may be as low as £4,000.
Personal pension contributions are paid net of basic rate Income Tax and your pension provider collects the tax relief from HMRC. Basic-rate tax relief is currently 20%. So, if you contribute £80 a month, £100 will be invested automatically in your plan – that’s an additional £20 at no extra cost to you. If you are a higher-rate or additional-rate taxpayer, you can claim the extra relief from HMRC on your yearly tax return or by asking your tax office to adjust your tax code. The value of any tax relief depends on your individual circumstances. It is essentially free money, so do not miss out.
‘Carry Forward’ to maximise pension contributions
Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme. This may be particularly useful if you are self-employed and your earnings change significantly each year, or if you are looking to make large pension contributions.
To use Carry Forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2020/2021), and you can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago. You cannot receive tax relief on contributions in excess of your earnings in a tax year, and you only receive higher-rate tax relief to the extent that you have paid it.
Think of your spouse
If your spouse is a lower or non-taxpayer, it is possible for them to transfer 20% of their unused personal allowance to their partner which could save up to £250 in tax.
Also, if you have income-producing assets (for example, buy-to-let property or even saving accounts), you could put these in the lower or non-taxpaying spouse’s name to lower your overall Income Tax liability. Assets can be passed between spouses without any CGT liabilities
Utilise your Capital Gains Tax allowance
Individuals have an annual CGT allowance that currently enables them to make gains on investments of up to £12,300 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% with disposals of residential property being taxed at 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Married couples may be able to use each other’s allowances by transferring assets before they are sold
If you’re trying to reduce or remove a potential Inheritance Tax (IHT) bill, making gifts to loved ones is one of the simplest methods. IHT at 40% is due on part of your estate when you die, if it’s over a particular value, currently up to a maximum of £650,000 for a married or civil partnership couple. That’s £325,000 per person, and potentially up to £1,000,000, (£500,000 each) if the estate includes a private residence of that value.
By making gifts during your lifetime, you can effectively reduce the value of your estate. The annual gift allowance lets you give up to £3,000 immediately free of IHT. Unused allowance carries over just one year.
There is also a ‘seven-year rule’, meaning gifts of any value are exempt from IHT if you live for at least seven years after making it.
There can be other tax considerations involved with the gift of assets so if you’d like to discuss the potential Inheritance Tax liable on your estate and the many ways you are able reduce it, please contact us.
Consider a salary sacrifice
A salary sacrifice is an especially tax-efficient way for you to make pension contributions and to save and reduce your Income Tax and National Insurance. With this in mind, it is well worth considering exchanging part of your salary for payments into an approved share scheme or additional pension contributions.
There is little time left to make use of these valuable tax allowances. Some currently roll over, others don’t. If you can, it’s advisable to make use of every allowance you’re presented with whilst its available.
If you’d like to discuss how best to manage your tax planning opportunities, please don’t hesitate to get in contact – email@example.com / 01334 650 030