Year-end is a busy time for individuals and business owners. There’s a lot of information to collate, understand and submit … and tax to save if you seize the opportunities available. With 5 April approaching fast, now is the time to make the most of allowances before the end of the tax year.
“It’s important to make your money work hard for you,” says Emily Bridges of re:accounts in Stevenage. “Year-end is an important time to evaluate what’s happened during the last twelve months and what you’d like to achieve in the coming year, although at re:accounts we work with clients to look further ahead. For business owners, it an opportunity to look at your business growth and direction, planning for success.”
Planning Tips before Year-End
1. Use your ISA and pension annual allowances
Free of Capital Gains and Income Tax, your full ISA allowance should be used as a priority each year as it’s one of the most tax-efficient ways to save.
Everyone over the age of 16 can save £20,000 each year in a cash ISA and anyone over the age of 18 can save the same amount in a Stocks and Shares ISA. Those aged 18 to 39 can open a Lifetime ISA and save up to £4,000 each year. Your ISA allowance cannot be carried forward to the following year.
Contributions to your private pension are tax-free to a maximum of 100% of your earnings during a tax year. In addition, for most people the total sum of personal contributions, employer contributions and government tax relief received can’t exceed the annual personal allowance of £40,000 (2021/22). More complex rules apply for the very highest earners under a tapering allowance that can reduce the annual allowance to as little as £4,000. (See our article on tax-savvy pensions.)
2. Use your capital gains allowance
Any investments held outside an ISA or pension will be subject to capital gains tax (CGT). Investors can make investment gains of up to £12,300 in 2021-22 without paying any tax. If you don’t use the full Annual Exempt Allowance (AEA) you’re entitled to, you’ll lose this opportunity as the exemption does not roll over to the new tax year. Jointly owned assets can use allowances of all owners should the sale of the asset make a gain.
3. Optimise your child benefit
Parents start to lose their child benefit when one earns more than £50,000, with the benefit lost completely when they earn £60,000. It’s a topic of much debate and frustration! If you have just exceeded the threshold, there are two ways to get around this. Firstly you could increase your pension contributions. Secondly, you could donate to charity from any income over the £50,000 limit. (This would be recorded on your tax return.)
4. Save for your children
Children have tax allowances that can be used each year. The Junior ISA annual allowance is currently £9,000. Spare cash can make the most of your children’s ISA allowance. When they reach 18 years old, their ISA automatically turns into a normal ISA and transfers into their name, giving them full access.
5. Protect your personal allowance
Most of us have a tax-free personal allowance of £12,570. When your taxable income reaches £100,000, your personal allowance is cut by £1 for every £2 of your income, which means you lose it completely once your income reaches £125,140. As with the child benefit solution above, you can protect your personal allowance by making charity donations or contributing to a pension.
6. Automatic investment
Dividends from ISA investments can be withdrawn tax-free. However if you reinvest them, you can buy more shares in the same investment, receiving more dividends next time there is a pay-out.
7. ‘Bed and ISA’ tax shelter
Investments outside of your Stock and Shares ISAs can be funnelled into your existing account using your investment platform’s ‘Bed and ISA’ service. The amount involved forms part of your annual allowance (£20,000). Dividends will be tax-free once within the ISA wrapper however you may need to pay Capital Gains Tax on any increase in value as you transfer your investment. Your annual allowance before Capital Gains Tax is incurred is £12,300 (2021-2022).
This option is especially helpful as the dividend tax is rising, with an extra 1.25% being added to all the tax rates regardless of the level of dividend tax you pay. ISA investments are protected from this increase as dividends have a tax-free status.
Would you like to minimise your tax liability?
Are you keen to make your money work as hard as possible for you in the next tax year?
Tax is the re:accounts team’s specialist subject. Saving tax is our superpower. We’d love to help you. Let’s talk.
