Are you ready?

22nd March 2021

Until recently, all eyes were on the Budget on 3 March, but now it is time to look ahead to the end of the tax year on 5 April, which is fast approaching, and make sure that you are prepared. I have outlined below a number of tax planning points that you may wish to consider.

Pension contributions

Tax deductible pension contributions of up to an annual allowance of £40,000 can be made each tax year, subject to a reduced allowance for those earning over certain thresholds, and provided a taxpayer has sufficient earnings to cover the contribution. In addition, unused allowances can be carried forward for up to three years. Any unused allowance from 2017/18 will be lost if not used by 5 April 2021 so it is worth considering whether to make an extra contribution now if you wish to maximise your contributions.

For those with low or no income, it is still possible to make a pension contribution of up to £2,880 (net) each tax year. The pension provider will reclaim 20% tax relief from HMRC so the pension would be credited with a gross contribution of £3,600.

Preserving your personal allowance

For those with income above £100,000, the personal allowance is tapered down from £12,500,  to nil once income reaches £125,000. This results in an effective tax rate of 60% on income within this band. The personal allowance can be preserved by making pension contributions or charitable donations to reduce the level of taxable income.

Gift aid

A tax deduction is available for cash donations to qualifying charities which includes UK registered charities. If a 45% taxpayer makes a donation of £10,000, the charity can reclaim £2,500 from HMRC and the taxpayer can obtain tax relief of £3,125 through their self assessment tax return. This means that the charity receives £12,500, with a net cost to the taxpayer of £6,875.

Using your capital gains tax annual exemption

The capital gains tax annual exemption of £12,300 is lost if not used in the tax year. Why not consider realising some tax free gains before 6 April, provided of course it fits with your investment strategy. Take care though, as if you sell shares and then repurchase them within 30 days then the sale will be matched to the repurchase meaning that you are unlikely to have realised a significant gain.

Claiming capital losses

Capital losses must be claimed within four years of the end of the tax year in which they arose. If you made disposals in the year ended 5 April 2017 then make sure these are claimed by 5 April 2021 or they will be lost forever.

Inheritance tax

You can give away up to £3,000 in a tax year with no inheritance tax consequences, with any unused allowance carried forward one year. If you have not made any gifts in the two years to 5 April 2021, you can therefore gift £6,000 tax-free – are you feeling generous?

Individual Savings Accounts (ISAs)

Each tax year you can put up to £20,000 into an ISA, which can be invested in cash or stocks and shares, with income and gains on the investments tax-free.  Have you used this year’s allowance?

Other tax efficient investments

Investments in certain tax efficient investments, such as Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and the Seed EIS, can provide immediate income tax relief as well as possible capital gains tax exemptions. However, make sure you take investment advice, and that you understand the risks associated with your investments.

Looking ahead

Now is also a good time to consider the coming tax year. If you know what income you are likely to earn in 2021/22, you can plan ahead by, for example, transferring an asset to your spouse to optimise the use of lower tax rate bands. Please note however that this must be an outright gift, so your spouse will be able to do what they like with the income. Or maybe you are planning a disposal of your business in the next year or two? If so, make sure you understand now how that will be taxed, and in particular check whether the disposal will qualify for Business Asset Disposal Relief (previously Entrepreneurs’ Relief). As the qualifying conditions have to be met for at least two years prior to the disposal, it is worth thinking about sooner rather than later.

Can we help?

The above is just an overview of some of the things you might want to consider – let us know if you would like to discuss any of the above in more detail.

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