Article written by Kellands Hale, our preferred independent advice firm.
This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfacts.co.uk does not endorse the content.
With the end of the tax year fast approaching, there may still be time to review your tax and financial affairs to make sure you have optimised all your tax allowances and tax planning opportunities. So here are a few things to look at before the start of the new tax year on 6 April 2022.
One of the first things to do, if you can, is to make sure you have used your ISA allowance. For the year 2021-22, this is £20,000 and is a good way to invest for the long-term. If you are looking to help the children in your life, you can also invest up to £9,000 per child into a Junior ISA.
Investing in an ISA makes sense as going forward any future returns are free of income tax, capital gains tax and dividend tax. However, don’t delay, as if you don’t use your allowance before the end of the tax year, it is lost forever.
If you have money available to invest, do not require access to the monies in the long term, and you are actively saving for retirement, then a pension contribution will be more tax-efficient than adding monies to an ISA.
Personal pension contributions can impact your overall taxable income. A pension is still one of the best ways of saving for retirement, as you get tax relief on the money you put into your pension pot up to 100% of your earnings or a maximum of £40,000 (whichever is less). For higher earners, the maximum may be restricted to £4,000, depending on your total taxable income. Because of this, you should look to pay in as much as you can afford on a regular basis.
Depending on how the contribution is made, a personal contribution has the added benefit of reducing your taxable earnings by the gross amount. This can help high earners to potentially regain any lost Personal Allowance, subject to the maximum permitted contribution limit.
If you haven’t used all your pension allowance in one year, you can ‘carry it forward’ for the three previous tax years. This means the use-by date from the tax year 2018/19 is 5 April 2022. So now is a good time to think about topping up your pension, particularly as this money can benefit from compounding and could add a significant amount to your total pension pot in the long-term. Certain criteria must be met to utilise carry forward, and advice should be sought in the first instance.
Bear in mind, however, that the pension lifetime allowance – i.e. the limit you can build up in pension benefits over your lifetime (without incurring a tax charge) while still enjoying the full tax benefits - has been frozen at £1,073,100 until April 2026.
For limited company owners, there are tax planning opportunities to make contributions from the business. Tax relief on employer contributions is given by allowing contributions to be deducted as an expense when calculating company profits, effectively reducing profit assessed against corporation tax. Corporation tax is 19% currently, increasing to 23% from April 2023. Employer contributions must satisfy the ‘wholly and exclusively’ requirement to receive tax relief.
The first step is to get your dividends tax-free via your ISA. However, you may have investments in stocks and shares as well, which means you could receive dividend income from these. If so, the first £2,000 of dividend income is tax-free. However, after that, you will be taxed according to your Income Tax band - 7.5% if you pay at the basic rate, 32.5% if you pay at the higher rate and 38.1% if you pay at the additional rate.
Please note that the rates of Dividend Tax are being increased from the start of the next tax year by 1.25% across the board, so once again it pays to try to beat the tax rise.
Those business owners who take an income from the business via dividends, and perhaps could afford not to take as much, could consider substituting some of that dividend income for an employer contribution instead. Dividends can only be paid out of profits, after corporation tax has been deducted. An employer contribution is not added to your income, so you do not increase your tax bill, and they are an allowable business expense, saving 19% corporation tax.
You should also be thinking about your potential inheritance tax (IHT) bill. Each individual has an annual exemption, allowing you to gift up to £3,000 each tax year. You can also carry over any unused allowance from the previous year, enabling you to potentially gift up to £6,000 in any one tax year (or £12,000 in conjunction with your partner). These gifts, along with the small gifts allowance of £250 per person, are immediately IHT-exempt. If you are gifting to the same person, the small gift allowance cannot be combined with any other gift allowance.
It could also be time to think about some longer-term inheritance tax planning as well as some of the actions you can take to help reduce the IHT liability of your estate.
As a reminder, IHT is usually charged on estates valued higher than £325,000 where a person has died and is passing on assets to beneficiaries. On top of that, for homeowners there is the Main Residence Nil Rate Band (MRNB) which can add a further allowance of up to £175,000*. However, the MRNB is only valid on your main residence and where the recipient of the home is a direct descendant (eg child, step-child, grandchild). The rules are complicated, so getting financial advice on this makes sense.
Where IHT is due, it is usually levied at 40% on the parts of the estate valued above your IHT allowances, but this bill can be managed and reduced using certain trusts, gift giving and charitable donations, as well as using the benefits of Business Relief, for example.
*This is the maximum amount available per individual and is frozen (along with the standard NRB) up to and including 2025/26 tax year. The value of the MRNRB for an estate will be the lower of the net value of the interest in the home (after deducting liabilities such as a mortgage) or the maximum amount of the band.
Finally, you may want to look at your capital gains tax situation. Each individual can realise capital gains of £12,300 free of capital gains tax (CGT), which means a married couple can realise gains of £24,600 free of CGT.
In most cases, any transfers of assets between married couples are free of both inheritance tax (in terms of gifting between spouses) and capital gains tax, and so this option should be considered where both annual exemptions can be used. You may also have capital losses carried forward from earlier years to use.
As a reminder, basic-rate income taxpayers pay 10% on anything above the annual allowance, and higher-rate taxpayers pay 20%. For property, the rates are higher: 18% and 28% respectively.
With just days to go before the end of the tax year, time is running out for you to act and this article only covers some of the main options. Tax planning is a complex area, so if you think you may need help before this year’s deadline, talk to us. We’d be delighted to help you with any query on your tax planning needs.
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