As we approach the end of the tax year on 5 April, with limited changes having been announced in the recent Budget, now is a good moment to think about end of year tax planning.
45% tax and loss of personal allowance
The highest rate of tax remains at 45%, applying to individuals with total income over £150,000. Personal allowances are tapered for individuals with income between £100,000 and £125,000 (2020/21), giving an effective tax rate in this band of 60%.
The following can help reduce taxable income:
- making pension contributions or charitable gift aid payments;
- transferring income-generating assets between spouses/civil partners if possible;
- using tax-free investments and/or tax efficient investments;
- investing in assets which generate capital growth rather than income; and
- altering the timing of income to maximise use of lower rate bands.
There are various tax-free and tax-efficient investments available. For independent, fee-based advice on whether any of these investments are suitable for you, we can put you in touch with a contact in our financial services team.
- Consider making tax-free investments through ISAs or National Savings.
- Make use of the annual ISA subscription (2020/21 limit £20,000). Consider Junior ISAs for children under 18.
- Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments provide tax shelter/deferral incentives.
Pension contributions annual allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of your annual allowance, or your net relevant earnings. It may also be possible to take advantage of your unused annual allowance from the three previous tax years. This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so you should seek advice before making contributions.
Individuals have a starting rate band of £5,000 for savings income, subject to total income, and £2,000 for dividend income. Savings and dividend income falling within these bands is taxed at 0%. Separate to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers. Spouses and civil partners should review who holds any taxable savings to ensure these allowances are utilised efficiently.
Gift aid donations to charity give tax relief at your highest marginal tax rate. Any cash donations made before 31 January of the following tax year, or the date of the submission of your tax return if earlier, can be carried back to the previous tax year. Cash donations made before both 31 January 2022 and the submission of your 2020/21 tax return can be included on your 2020/21 tax return.
Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief.
Individuals can gift quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from Capital Gains Tax.
Capital Gains Tax
Subject to the availability of any reliefs, Capital Gains Tax is generally currently charged at either 10% or 20%, depending upon the marginal rate for the year of disposal, for all gains above the annual exemption (£12,300 in 2020/21 for individuals). Rates of 18% and 28% apply on gains arising on the disposal of residential properties.
Consideration can be given to selling assets at a gain to use your annual exemption. Assets could also be transferred between spouses where appropriate to maximise reliefs available. Particular consideration needs to be given where a property is transferred between spouses, as new rules came in from 6 April 2020 as to how the ownership history is transferred for private residence relief purposes.
Consideration can also be given to selling any assets which stand at a loss if you have realised large capital gains, and also making a ‘negligible value’ claim on assets that currently have no value.
Both tax and investment advice should be taken in advance.
Trustees may want to review whether distributions should be made before 5 April 2021. Trustees may also wish to give consideration to the Capital Gains Tax annual exemption to determine whether or not any assets should be sold in the tax year.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.