With the end of the tax year fast approaching, now is the time to think about whether anything can be done to minimise your tax burden.
If you haven’t made use of your CGT annual exemption, this year or you are worried about whether to make any further personal pension contributions, please do get in touch.
For business owners, you will need to consider whether you have drawn dividends to make use of your tax bands or whether there is capital spending to be made before the end of March.
Income tax rates
For 2021/22 the personal allowance is £12,570. This is set to be frozen until 2026 and is tax-free.
For taxpayers in England, Wales or Northern Ireland, the basic rate threshold is £37,700 so income over £50,270 is liable to income tax at the higher rate of 40%, (or 32.5% for dividends).
Taxpayers with personal income above £100,000, will lose £1 of their personal allowance for every £2 of income above £100,000, so the effective rate shoots up to 60% between £100,000 and £125,140 for 2021/22. Personal income over £150,000 is taxed at 45% (or 38.1% for dividends).
You may be able to reduce the income being taxed at these high rates by taking advantage of the following:
- Moving income yielding assets to a spouse with lower income
- Deferring income to a later tax year
- Making pension contributions
- Making gift aid donations
Dividend tax rates
From 6 April 2022, tax on dividends will increase by 1.25%. This will increase the dividend rates to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for higher rate taxpayers. Therefore, dividends should be taken prior to 5 April 2022 to utilise the lower tax rates.
In order to withdraw dividends, the company must have enough distributable profits, so you will need to take into account corporation tax and other liabilities. Please do get in touch if you want to discuss how best to extract the profits of your business.
Savings and Investment:
Savings and Interest tax bands:
For basic rate taxpayers, there is a savings allowance of £1,000, which means the first £1,000 of savings income is tax free. For higher rate taxpayers, the savings allowance is £500, and for additional rate taxpayers it is withdrawn altogether. The savings allowance is not transferable between spouses, so it is important to ensure that bank accounts are held to maximise it.
Individual Savings Accounts (ISAs) are savings accounts that are completely free of tax on both the income and capital growth. There is no lock-in period, minimum subscription, or lifetime limit. The maximum contribution for 2021/22 remains £20,000.
The limit for a Lifetime ISA is currently £4,000 and there is an additional allowance of £9,000 that can be placed by parents into a junior ISA for children. Relatives and friends can also contribute into your child’s Lifetime ISA.
Capital Gains Tax:
UK tax residents are entitled to an annual CGT exempt amount which for 2021/22 is £12,300. This is especially useful for those with readily realisable assets such as shares. This allowance cannot be carried forward. It is therefore advisable to make use of this allowance each year, if possible, by selling assets that are standing at a profit, ie crystalising gains each year to the extent of the allowance.
Please note that if you buy back the shares within 30 days, anti-avoidance rules will kick in. However, these will not apply if another person such as a spouse acquires the shares. Inter-spouse transfers or gifts of assets remain free of CGT. Married couples can therefore look to maximise their combined allowances of £24,600.
The buy back rules do not apply if you are moving your investments into an ISA tax wrapper (see above). This tax planning is sometimes called “Bed and ISA” and is an effective way of using your CGT annual exemption and ISA allowance.
Reviewing your pension contributions should form part of your end of year planning, whether it’s to make use of your annual allowances and those unused from earlier years (2018/19 onwards) or to preserve your personal allowance when your income is over £100,000. The maximum that can be held as a Lifetime Allowance is currently £1,073,100.
The annual allowance remains at £40,000 for those with income below £200,000. For those with income above £240,000, it is tapered to £4,000. For those with income above £200,000, you will need advice as to whether your pension contributions are exceeding the annual allowance. There will be an annual allowance charge if your contributions exceed the annual allowance.
Whether or not you are earning, any UK resident under 75 can contribute up to £2,880 into a stakeholder pension each year. HMRC will add an additional 20% to make it £3,600.
Consider saving up to £3,600 into a pension for your spouse, civil partner, or a child, even if they have no earnings of their own, to obtain basic rate tax relief on the contributions.
Negligible Value Assets:
It may be beneficial to consider whether any assets or investments have fallen in value and are now worthless. This may include a loan to a UK business which is now irrecoverable. If the loss relates to shares in an unquoted company that carried on a trade, it may be possible to offset the loss and reduce your income tax liability.
Enterprise Investment Schemes (EIS), SEED Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCTs):
The EIS, SEIS and VCT reliefs were introduced to provide incentives to investors to invest in small unquoted companies, which are generally perceived to be higher-risk investments.
The main incentive is income tax relief but there are also other valuable tax reliefs including CGT deferral relief, loss relief on disposal, CGT exemption and IHT relief where conditions are met.
The annual gift exemption of up to £3,000 can be used in each tax year. If unused, the allowance can be carried forward one year, so if you did not make gifts last year, you may consider making gifts of £6,000 before the end of the tax year. You can also give up to £250 to as many people as you wish per tax year, under the small gifts exemption.
‘Gifts out of income’ is a further valuable exemption. Please contact us so that we can advise what records should be kept and the format they should be in to ensure that they comply.
Wills and planning:
The nil rate band currently remains frozen at £325,000. There is now however the residence nil rate band of £175,000 for estates worth up to £2 million. And when you leave at least 10% of your estate to charity, the rate of inheritance tax on the remainder of your estate will be taxed at 36% instead of 40%.
Wills should therefore be regularly reviewed to ensure they make use of these allowances and reliefs.
Corporation tax rates:
From April 2023, the main rate of corporation tax is set to increase to 25%. Businesses with profits less than £50,000 will continue to be taxed at 19% but the rate is tapered for businesses with profits between £50,000 to £250,000. This gives an effective corporation tax rate of 26.5% for profits over £50,000.
Thought therefore should be put into the timing of company expenditure in order to maximise tax efficiency.
Trading loss relief:
A temporary measure was introduced due to the Covid-19 pandemic. Usually, losses arising in the financial year can be offset against income of the current year or the previous year. However, losses arising in financial periods ending within the two years to 31 March 2022 can now be offset against trading profits in the previous three years.
Capital allowances- super deduction:
Businesses should look at making any investment in new plant and machinery up to the end of March 2023. Companies will be able to claim 130% capital allowances on qualifying plant and machinery investments. For every pound a company invests, their taxes are cut by up to 25p.
Other reliefs and allowances
Annual Property and Trading Allowance:
You can get up to £1,000 a year in tax-free allowances for gross property or trading income. If you have both types of income, you’ll get a £1,000 allowance for each. If you are in receipt of such income then you should consider claiming the allowance. Gross income means the total amount you get before any allowances or expenses. Please note that you can’t deduct any other expenses or allowances if you claim this allowance.
Rent A Room Scheme:
You can receive £7,500 (or £3,750 if letting jointly) a year tax free by providing furnished accommodation in your own home. This is not only for lodgers but also for bed and breakfast and Airbnb arrangements.
Working at home:
The working from home allowance remains at £6 per week. If you have been required to work from home by your employer, you can claim a tax-free allowance of £6 per week or £26 per month either from your employer or as a deduction on your tax return. This is to cover the additional costs incurred by using your home as a workplace, such as electricity, gas, metered water, insurance, and broadband costs.
If you or your spouse is a basic rate taxpayer and the other has taxable income below the personal allowance, you could make use of the marriage allowance. Marriage allowance is the transfer of up to 10% of the personal allowance, (£1,260 for 2021/22) to your spouse.
If any of the above are of interest to you, please call us on 0207 384 2647