Our top 5 planning tips for the end of the tax year.
Tax Year End Planning.
When does the tax year end?
The tax year 2020/21 ends on 5th April 2021. Our team of advisers have summarised their top tax planning tips in a Q&A to help you create, preserve, enhance and enjoy your wealth.
- How much should I pay into my pension this year?
If you can afford to do so, making pension payments is a great way to save money for the future in a tax efficient manner.
You can make considerable income tax savings when you make pension contributions. It is possible to make gross contributions into your own pension plan this year of 100% of earnings (up to £40,000). For non-tax payers, and contributions to children’s or grandchildren’s pensions, you can make a net contribution of £2,880 which is topped up to £3,600 by HMRC.
Please note, higher earners are restricted as to how much they can contribute towards their pension.
Contributions to your work place pension may be made as a salary sacrifice and therefore potentially reduce your income tax payable.
Contributions to a pension will be of particular interest if your income is above the higher rate or additional rate income tax thresholds, or if your income is between £100,000 and £125,000, as tax relief is available at an effective rate of 60% on income within this bracket. In addition, pension payments are also an effective way of reducing the high income child benefit tax charge for those earning over £50,000 per annum.
Once individuals have maximised pension contributions for the current tax year, it is possible to carry forward unused allowances from the previous three tax years, meaning that whilst the annual allowance that can be contributed towards a pension has decreased in recent years it is still possible to make a meaningful lump sum contribution. The opportunity to utilise any remaining 2017/18 allowance draws to a close at the end of the current tax year.
Action Tip: Review pension contributions in the last three years to date and considering paying in the most you can afford (up to £40,000 this year) and children (up to £2,880) before 5th April
- How much can I pay into an ISA this year?
An ISA (individual Savings Account) is a tax efficient account that offers tax-free growth and income, and can provide exposure to a variety of asset classes, including stocks and shares, mainstream bonds, cash and peer-to-peer loans.
ISA contributions are worth considering, not just for your own finances, but also for your children and even your grandchildren. The maximum permitted contribution limits are £20,000 for adults and £9,000 for children up to age 18. For children aged 16 and 17, they may use both allowances, amounting to a healthy total of £29,000 worth of savings (often referred to as the “junior ISA loophole”).
Lifetime ISAs are available for those aged between 18 and 39, primarily to help them save for a house deposit. They can save up to a maximum of £4,000 per annum until age 50, but cannot withdraw these funds unless purchasing a property or turning 60 (or having a terminal illness). The government will pay a 25% bonus on new additions to the ISA.
Action Tip: Review ISA contributions in the year to date and pay in the most you can afford (up to £20,000 this year) and for children up to 15 (up to £9,000) and for children aged 16 and 17 (£29,000) before 5th April
- Capital Gains Tax (CGT) – what do I need to know?
CGT is the tax you will pay on the profit realised on the sale (disposal) or gift of an asset that has increased in value.
The individual annual CGT exemption (£12,300 for 2020/21) cannot be carried forward, although transfers between spouses do not trigger CGT. Timing and taxable earnings brackets are important:
- gains are taxed at 20% above basic rate band (28% on residential property),
- 10% on any unused basic rate band (18% for residential property or private equity interest)
- 10% if qualifying for Entrepreneurs’ relief up to £1 million
Action Tip: Review your capital gains tax position and consider realising gains sufficient to utilise your CGT annual exemption
- What is the Inheritance Tax (IHT) annual gift exemption?
You are able to make gifts of up to £3,000 per annum, which are immediately exempt from IHT. The allowance can be carried forward one year.
Additionally, you may wish to consider utilising the gifts from surplus income exemption, where gifts from surplus income are immediately exempt from IHT if the annual pattern of gifting meets certain criteria.
Action Tip: Consider making gifts utilising either the annual gift exemption or the surplus income exemption
- Should I consider a charitable donation?
Through Gift Aid, higher rate taxpayers can claim income tax relief of 20% (additional rate taxpayers 25%) on the total value of their charitable donations. Gift Aid can be carried back to the previous tax year. Tax relief allows UK charities to reclaim an extra 25% in tax on every eligible donation made and is well worth considering.
Action Tip: Consider making charitable donations to claim Gift Aid either against your current year income or against your income for 2019/20.
These tips are intended to give a few examples of some of the tax planning options that are available. If you would like to review tax planning that may be relevant to your situation, please contact one of our advisers, who would be happy to help.
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