Personal tax planning ahead of 5th April
The end of another tax year is upon us, with a little over 3 weeks left before the calendar rolls over to 5th April. Here are a few things to consider ahead of that date that may effect your personal tax bill for 2021-22
Please note that none of the below constitutes formal advice, just areas to consider and you should seek professional guidance before making any decisions- for a formal consultation please contact us directly
1. Maximise government allowances
Pensions benefit from tax relief at 20% for basic rate taxpayers, but higher and additional rate payers can reclaim an additional 20% or 25% tax relief respectively through their tax return. So a basic rate taxpayer every £1 in your pension only costs you 80p and for a higher rate taxpayer every £1 in your pension only costs you 60p. So it is well worth checking how much you have contributed into your pension this year and if you could contribute more. Again please seek qualified pension advice before taking action.
Lifetime ISA can also get up to £1,000 of additional cash from the government each year, if you put in the maximum £4,000 contribution. Lifetime ISA's are designed to help people get a first foot on the property ladder, and age limit for opening them is 39. While you can withdraw the money at either age 60, or beforehand if you are using it to buy your first home, if you exit early for any other reason there is a 25% exit penalty.
You should also check whether you qualify for marriage allowance, where you or your spouse could potentially transfer any unused personal allowance over to the other, or tax-free childcare, which gives a 20% top-up to money you use for childcare.
2. Use your ISA and pension annual allowances
ISA's are very much a "use it or lose it" type deal. The ISA Limit and maximum you can save each year is £20,000. The tax year runs from 6 April to 5 April the following year. Under the current rules, you can put the full amount in either a cash, investment ISA and any interest, capital gains or dividends received under the ISA wrapper remain free of tax. However any unused allowance does not roll forward. So if you have say only paid £18,000 in to your ISA this year, it does not mean you get a £22,000 allowance next year, still only £20,000.
The pension annual allowance for this tax year is £40,000 or 100% of earnings if that is lower - this includes both contributions made by you and your employer. However, the annual allowance can be carried forward for up to three years. Note that anyone with a very high income or who has already started to take taxable income from their pension will have a restricted annual pension limit. If you want to carry forward any previously unused pension allowance, you will only get tax relief on personal contributions up to 100% of your earnings for that year.
3. Use your capital gains allowance to cut your future tax bill Any investments held outside an ISA or pension will be subject to Capital Gains Tax (CGT), which means the annual tax-free allowance is very valuable. Investors can make investment gains of up to £12,300 in 2021-22 without paying any tax.If you’re in a couple you can get double this allowance as you can transfer investments to your spouse to use their annual CGT allowance too. This means that for the current tax year you can lock-in up to £24,600 of gains before you face any tax.
We refer to a slightly older article here where we talk about using "Bed and ISA" for your investments, whereby you can use up your capital gains allowance by selling listed stocks and shares you may hold outside of an ISA, upto a gain of 12,300, and then re-buying them in your ISA, to get any future gains inside the ISA wrapper - Again you should seek advice before taking any action.
4. Avoid "tax traps"
The tax-free personal allowance for most people is currently £12,570. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income, which means you lose it completely once your income reaches £125,140.
For example, someone who gets a pay rise from £100,000 to £110,000 will lose £5,000 of their personal allowance. They will be taxed at the normal 40% income tax on their pay rise, amounting to £4,000, and then taxed at 40% on their lost personal allowance, amounting to £2,000. This means they pay £6,000 on the £10,000 pay rise – an effective tax rate of 60%.
If you are in this position, you could consider reducing your taxable income so that it falls below the £100,000 level where the personal allowance starts to be eroded. There are two ways you can do this: by making charity donations or contributing to a pension.
The same applies to repaying child benefit once your income breaches the £50,000 threshold - pension or charitable contributions can help reduce your income
Saving for your children Children also have tax allowances that can be used each year. The Junior ISA allowance is now £9,000 a year, which means that you can start saving for their future in a tax efficient way . The money is locked until they are 18, at which point the ISA converts to a standard one. E.G £50 a month from birth, earning 5% returns a year, would give your child a £16,000 on their 18th birthday.
Again, this allowance is very much in the "use it or lose it" category, as unused allowances do not carry forward.
You can also pay up to £2,880 into a Junior SIPP each year, with government tax relief increasing that to £3,600. Your child will not be able to access the money until they are at least age 57, although this is likely to increase.