2021/22 Tax Year End Planning
As another tax year draws to an end, it is worth thinking about whether any last minute tax planning could be undertaken prior to 5 April.
There are a number of areas that could be looked at and we have highlighted a few below.
Using Allowances and Bands
A good starting point is to ensure that you have received sufficient salary and dividends to utilise your tax free personal allowance (£12,570) and your basic rate band (£12,571 to £50,270).
Whilst the threshold for additional rate of tax (45%) is £150,000, if your income exceeds £100,000 then you will lose your personal allowance and suffer a 60% marginal tax rate on the slice of income between £100,000 and £125,140. If your annual income is likely to fall in this range or just above it, you should consider if any steps can be taken to limit income to £100,000 in the year.
Business owners should also consider whether it is possible to utilise bands for their spouses and children as this could allow a family income well in excess of £100,000 but avoiding the 60% marginal rate.
Personal Tax Reliefs
If you contribute to a personal or company pension scheme then you should check that you have utilised your pension allowances plus any brought forward allowances for the year. For all except the highest earners, a combination of you and your employer can contribute up to £40,000 to your pension in any tax year – with the ability to bring forward any unused allowances for the previous year. Personal pension contributions made by higher-rate taxpayers entitle you to relief from higher rate tax on the contributions.
Another voluntary payment type which qualifies for relief from higher rate tax are ‘gift aid’ donations. Charitable donations do not necessarily need to be made before 5th April as it is possible to carry-back donations made after 6thApril but before your tax return is filed. This can be a very useful tool for anyone that is near a tax rate threshold change – in particularly the band between £100,000 and £125,140 of income.
Tax Efficient Investments
Although cash ISAs are widely known about, fewer people are aware of the tax benefits of ‘stocks and shares’ ISAs. Every taxpayer over 18 can invest up to £20,000 a year in shares, listed bonds and various unitised investments. As long as the investments remain in the ISA wrapper, any income and gains generated are tax free. By regularly saving using these products a taxpayer could build up a substantial tax free investment portfolio over a number of years and unlike a pension there are no access restrictions. When considering making investments, advice from a qualified and FCA regulated investment professional should be taken.
It is also worthwhile considering other tax efficient investments in to EIS, SEIS or VCT companies. All of these come with different levels of risk and we would recommend speaking to a Wealth Manager or Independent Financial Adviser about these as part of your investment strategy.
Changes to National Insurance and Dividends Tax Rates
The Government is intending to introduce a new Health and Social Care Levy with effect from 6 April 2023 and as a precursor to this, they will be temporarily increasing National Insurance and Dividend tax rates by 1.25% from 6 April this year. Please see our separate blog on this covering various options and planning.
Changes to Basis Periods for Partners & The Self Employed
Currently the taxable income of sole traders and partners in partnerships in any given tax year is based on the annual accounting period that finishes during that year. So (for example) if you opt to prepare accounts to 31 December each year, your profit for that 12 month set of accounts is included in your tax return covering the year up to the next April.
The Government had announced that in the near future taxpayers would need to calculate their profits on a tax year basis (by apportioning profits from different accounting years or by changing their accounting year to align with the tax year). The Government has pushed back plans to align all basis periods with the tax year by 12 months – the transitional year will now be 2023/24. This gives us a bit more time to plan for this.
This change will impact all partnerships, LLPs and self-employed persons who have an accounting period that ends on any date other than 31 March or 5 April. We will be writing a separate blog on this in the near future to set-out the implications and any planning that might be possible.
It will also be prudent for these businesses to consider changing their year ends to align with the tax year to save having to apportion profits every year, which will be an administrative burden and could result in higher professional fees.
Changes to Capital Allowances
The Government introduced two significant changes to Capital Allowances (130% Super Deduction and 50% Special Allowance) last year but these both relate to companies rather than individuals. They are potentially very valuable reliefs for anyone that owns and operates a company.
Although initially excluded, the Government widen these reliefs to allow landlord companies to benefit as well, which could be important for any Family Investment Companies that have rental properties – particularly furnished holiday lets.
Finally, you should also consider:-
- Have you used your Capital Gains Tax annual exemption (£12,300)?
- If you sell a residential property, please remember that you have to report the gain and pay any tax due within 60 days.
- Have you used your IHT annual allowance (£3,000) plus any allowance brought forward from the previous year?
Should you have any questions or if you would like to discuss any of the planning options mentioned above then please do not hesitate to contact us.