Tax planning reimagined

Due to the complexities of the tax planning system, without expert professional financial advice, some individuals could be paying more tax than necessary. Before the end of every tax year on 5 April, you have the opportunity to save money on taxes and plan for the year ahead.

As we approach the end of the tax year, now is the time to review your tax affairs. This is to ensure that you have taken advantage of all reliefs and options available to you. If you think you may be overpaying tax, here are some ways in which you might be able to reduce your bill. This information should not be construed as advice and is applicable to the 2020/21 tax year-end.

Income Tax

Keep your personal allowance

Income Tax rules appear simple at first: income under £12,500 is within your tax-free personal allowance, and increasing rates apply to income in higher bands.

But there is an additional rule: for every £2 you earn over £100,000, your personal allowance reduces by £1. Once you reach £125,000 your personal allowance is zero.

If you’re close to the £100,000 threshold, it may therefore be sensible to request tax-efficient alternatives to bonuses or salary increases, such as higher pension contributions.

Transfer assets to your partner

If you’re close to the £100,000 threshold and you have other income yielding assets, you could consider transferring these to a partner with a lower taxable income.

Claim tax relief for working from home

If you’re currently working from home due to the coronavirus (COVID-19) pandemic you may be entitled to tax relief for your increased costs, such as heating or broadband. You could claim the exact amount, based on bills and receipts, or a set amount of £6 per week.

Review your Child Benefit

Individuals with a taxable income of over £50,000 who claim Child Benefit will pay a higher income Child Benefit charge, which could be equal to the benefit you receive.

Your options for reducing this charge include keeping your taxable income below the threshold (by exchanging salary for tax-efficient alternatives), temporarily stopping your Child Benefit, or deciding not to claim.

Dividend Tax

Use your dividend allowance

Dividend income is taxed differently to other income. Every taxpayer has a tax-free dividend allowance of £2,000. Dividend income is taxed at 7.5% in the basic rate band if it is above, 32.5% in the higher rate band, and 38.1% in the additional rate band.

Company owners can therefore benefit by taking income from dividends rather than salary.

Capital Gains Tax

Use your Capital Gains Allowance

Every taxpayer has a tax-free allowance of £12,300 when realising capital gains. Careful consideration of the split of assets between spouses can have a significant beneficial impact on a couple’s Income Tax burden.

If you’re approaching this limit, you may want to consider transferring assets to your partner to use their allowance.

Invest for capital gains

Capital gains are currently treated more favourably than income and dividends for taxation purposes, at a maximum rate of 20% (28% for residential property). However, this is currently under review.

So, for investments outside of a tax-efficient wrapper, for example, an Individual Savings Account (ISA), it can be more tax-efficient to target a return through capital gains. This is alternatively to interest or dividend income.

Savings Account (ISA)

Use your ISA allowances

All UK residents over the age of 18 have an annual ISA allowance of £20,000. The ISA allowance can be saved or invested in a tax-efficient environment. Under-18s have an allowance of £9,000 each.

Lifetime ISAs

Contributions into a Lifetime ISA qualify for a 25% government bonus. This can be a tax-efficient way to help adult children buy a home.

Pension Tax Relief

Review your pension contributions

Whether you are about to retire or are still working towards putting your fund together for retirement, there are many things that you should consider when it comes to planning your pension.

Pension contributions made through your employer are often the most tax-efficient. So, discuss options with your employer to exchange some of your salary for larger pension contributions. If you own the company, this could also help you save on Corporation Tax.

Carry forward your pension allowance

Your pension annual allowance (the amount you can make in contributions while claiming tax relief) is capped at £40,000. It is reduced for higher earners who exceed the limits on threshold income and adjusted income (as a guide, this typically applies only if your income is above £200,000).
So, if your taxable income increases above these thresholds, your annual allowance could drop dramatically. Carrying forward unused annual allowance from up to three previous years could allow you to claim more tax relief.

Make pension contributions for others

If you have used your annual allowance, you can still contribute to other people’s pensions. This can include your children and grandchildren, and they will receive tax relief.

Protect your pension

There is a Lifetime Allowance on pension savings, currently £1,073,100. Above that limit, you’ll be taxed severely when taking benefits. If you’re approaching that limit, you should seek advice on applying for protection before accessing your pension.

Inheritence Tax (IHT)

Use your IHT nil-rate band

Your nil-rate band for IHT is £325,000, plus any unused nil-rate band from a deceased partner. You also have an additional nil-rate band of £175,000 when leaving a home to a direct descendant.

Claim IHT relief on charitable gifts

If you leave at least 10% of your total estate to charity, IHT is applied on the portion outside of your nil-rate band. This is at a reduced rate of 36% (otherwise 40%).

Use IHT reliefs while available

IHT reliefs currently under review include Agricultural Relief and Business Relief. Business owners in particular should look at how their estate is arranged to ensure their wealth can be passed on efficiently.

Update your Will

When there is any significant change in your financial circumstances, or to tax rules, reviewing and updating your Will can help to reduce your IHT exposure.

For more information on tax planning or to discuss any of the issues raised in this article, please contact your adviser, or contact us directly on 0161 819 1131. Further information can also be found at gov.uk.