Spring is coming, and the end of the 2021/22 tax year is under a month away, on Tuesday 5th April. Now is the time to consider tax planning opportunities and ensure you use all the annual tax allowances and exemptions available to you.
We have broken this guide into helpful sections:
- Income tax
- Capital Gains tax
- Inheritance tax
- Year-end checklist
- Graham’s Marathon for Cancer Research UK
Personal circumstances differ, so if you have any questions or if there is a particular area you are concerned about, please do not hesitate to contact us. If you have not done so already, take the time to carry out a review of your tax and financial affairs to identify any tax planning opportunities and act before it’s too late.
With the impacts of the COVID pandemic and now the ongoing tragedy in Ukraine, government finances are under stress, and this could well have an impact on future allowances and rates for all taxes.
The Chancellor’s Spring statement is two weeks away, on Wednesday 23rd March, the same date he has asked the official forecaster, the Office for Budget Responsibility, to publish an economic and fiscal forecast.
Will he abandon or delay the planned 1.25% increase to National Insurance rates, which will add more than £500 to the annual tax bill of a £50,000 earner? The government finances need the £12bn “health and social care levy”, but much higher-than-expected inflation could already result in the biggest fall in real-terms earnings in eight years.
But back to the present, and the actions you should consider between now and 5th April.
And we have a small favour to ask at the end.
Check your PAYE tax code
Your tax code determines the amount you can earn before tax is deducted. If you have multiple employers or pension providers, you may get more than one tax code. HMRC has been known to get these wrong.
Don’t forget, you are not only building a pension pot to use in your retirement, but could also pass it on to future generations, with no Inheritance Tax.
Tax relief is available at an individual’s highest rate of tax, although relief is limited to contributions of £40,000 per annum and £4,000 for the highest earners.
Unused relief can be carried forward for three years but is then lost. Contributions made by yourself, and by your employer on your behalf more than available allowances will attract a tax charge.
Pension contributions can reduce your tax liability by increasing the tax thresholds.
If you haven’t used all your allowance in the last three tax years, it might be possible to pay more into your pension plan by ‘carrying forward’ whatever allowance is left to make the most of the tax relief on offer, though bear in mind the amount is still capped at 100% of your earnings.
However, different rules apply if you’ve already started to take money out of your pension plan and you’re affected by the Money Purchase Annual Allowance, or if your income when added to your employer’s payments are more than £240,000.
There is also a lifetime allowance, which is the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. If you go over the allowance, you’ll generally pay a tax charge on the excess at certain times. The lifetime allowance for most people is £1,073,100 in the tax year 2021/22 and has been frozen at this level until the 2025/26 tax year.
The allowance applies to the total of all the pensions you have, including the value of pensions you have through any defined benefit (final salary or career average) schemes you belong to; any savings you have in defined contribution pensions, but excluding your State Pension.
Employer pension contributions save NICs
If you pay employee pension contributions out of your salary, both you and your employer must pay National Insurance Contributions (NICs) on that salary.
When your employer pays a contribution directly into your pension scheme, the employer receives tax relief for the contribution and there are no NICs to pay – a saving for both you and your employer.
You could arrange with your employer to cover the cost of the contributions by foregoing part of your salary or bonus. You must agree in writing to adjust your salary before the revised pension contributions are paid for this arrangement to be tax effective. There has been a general clampdown on salary sacrifice arrangements, but pension contributions are not caught by it.
Gift Aided donations to UK registered (and some EU) charities qualify for tax relief at the donor’s marginal rate of tax. They can also be related back to the previous tax year if made before your tax return is submitted to HMRC.
Be careful to only Gift Aid charity donations if you are a taxpayer. If you do not pay tax in the UK, you will be required to ‘make good’ with HMRC the tax reclaimed by the charity.
Ideally, the person in the family with the highest marginal tax rate should be making the Gift Aid payments.
Personal Allowance preservation
Where income exceeds £100,000 the tax-free allowance of £12,570 is reduced, producing a hidden 60% tax rate. Both pension contributions and Gift Aid donations can preserve the full allowance and give an effective rate of relief of up to 60%.
Tax efficient investments
For example: Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT).
Investment in any of the above schemes could provide Income Tax relief of up to 30% for EIS and VCT or 50% for SEIS investments and the eventual sale of the shares may also be exempt from tax. Capital gains can also be deferred against EIS & SEIS investments.
Individual Savings Accounts (ISAs)
For 2021/22, individuals can contribute up to £20,000 to ISA accounts, which give tax-free income and capital gains.
The limit of £20,000 is across all ISA products including the cash ISA, Lifetime ISA, Innovative Finance ISA and Stocks and Shares ISA (the limit for contributions to a Junior ISA for 2021/22 is £9,000).
From 6 April 2022, a new allowance will be available but any unused allowance from the previous year will be lost.
Tax-free savings and dividend allowances
For 2021/22, savings income of up to £1,000 is exempt for basic rate taxpayers, with a £500 exemption for higher rate taxpayers. The tax-free dividend allowance is £2,000 for all taxpayers.
Married couples and registered civil partners could save tax by ensuring that each person has enough of the right type of income to make use of the tax-free allowances.
Equalising income levels/assets between spouses
Where one partner earns significantly less than the other, it is worth considering transferring income producing assets to the lower earner.
For example, moving high interest earning bank accounts or transferring shares into the name of the lower earner to ensure the Personal Allowance of £12,570, as well as the Dividend Allowance of £2,000 and Personal Savings Allowance of £1,000 for basic rate taxpayers (£500 for higher rate), are being utilised by both parties.
If your spouse or civil partner has little or no income, you might want to consider the ownership of income-producing assets. This may involve redistributing income-producing assets to minimise the couple’s tax liability – but be mindful of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift, with ‘no strings attached’.
Transfer part of your personal allowance
Married couples and registered civil partners are permitted to share 10% of their personal allowance between them. The unused allowance of one partner can be used by the other, meaning an overall combined tax saving. The amount you can transfer is £1,260 for 2021/22 and a transfer is not permitted if the recipient partner pays tax at a rate higher than the basic rate of 20% (higher than the intermediate rate of 21% for Scottish taxpayers).
The transfer can produce tax relief of up to £252 in the current tax year.
Contribute up to £9,000 into your child’s Junior ISA
The fund builds up free of tax on investment income and capital gains until your child reaches age 18, when the funds can either be withdrawn or rolled over into an adult ISA. Relatives and friends can also contribute to your child’s Junior ISA, provided the £9,000 limit for 2021/22 is not breached.
The Child Benefit trap
Families receiving Child Benefit where at least one parent has ‘adjusted net income’ of more than £50,000 are liable for a claw-back of benefit. Where the adjusted net income is more than £60,000, all the Child Benefit will be withdrawn. Where income is between £50,000 and £60,000, a portion will be lost.
Although Child Benefit is normally paid to the mother, it could be the father or step-father who suffers the claw-back through the tax system. The claw-back will normally occur by including it in a Self-Assessment Return or through the PAYE code.
Alternatively, the family can elect not to receive Child Benefit. Opting out may not be the best choice for those with incomes between £50,000 and £60,000 because they would lose out on the portion they are entitled to. Those who choose to opt out should still complete claims for any new children, so that parents who stay at home to look after their children can receive credits to their national insurance contribution record, which count towards their state pension.
For some there may be opportunities to share income differently between partners to reduce the higher income below one of the threshold amounts. The ‘adjusted net income’ can be reduced by making Gift Aid donations to charity or paying money into a pension.
Those who are employed may be able to agree a salary sacrifice arrangement with their employer, through contributions to their pension, thereby making further savings on National Insurance for both employer and employee.
There remains much debate as to whether Capital Gains Tax will increase, following reports from the Office of Tax Simplification (OTS) in 2020 and 2021.
Individuals have a CGT annual exemption each year (£12,300 for 2021/22). Gains within this limit are tax-free. This is useful where shares are held outside an ISA and you are looking to sell, perhaps to fund an ISA subscription.
If you are thinking of making a larger disposal, spreading this across more than one tax year can save tax. The CGT exemption cannot be carried forward from one tax year to the next.
It may be worthwhile crystallising available losses for offset against capital gains.
If you realise capital gains and losses in the same tax year, the losses are offset against the gains before the capital gains tax exempt amount (£12,300 in 2021/22) is deducted. Capital
losses will be wasted if gains would otherwise be covered by your exempt amount. Consider postponing a sale that will generate a loss until the following tax year or, alternatively, realise more gains in the current year.
Make IHT-free gifts each tax year
Small gifts of £250 per person as many as you care to make per tax year. This provides the opportunity of gifting £250 to each child or grandchild every tax year.
Total gifts exceeding £250 per recipient and up to £3,000 per tax year are free of Inheritance Tax and, if you forget to use your £3,000 exemption one year, you can catch up in the next tax year by giving a total of £6,000 but you can only carry forward the £3,000 allowance for one tax year.
Remember, you and your spouse or registered civil partner can each give £3,000 out of your capital every tax year in addition to gifts you make out of your regular income.
Make regular IHT-free gifts
As long as you establish a pattern of gifts that can be shown to be covered by your net income, without reducing either your capital assets or your normal standard of living, these gifts will be free of Inheritance Tax. The recipients of the gifts need not be the same people each year.
Great care however needs to be taken to ensure that the gifts are habitual in nature and are out of income which is in excess of regular expenditure. These gifts could include making the following for children/grandchildren:
- pension contributions
- ISA subscriptions
- university fees
- accommodation costs
- family holidays.
This is a complex area and advice should be sought.
Use the IHT marriage exemption
If your son or daughter is about to marry, you and your spouse can each give them £5,000
in consideration of the marriage, and the gift will be free of Inheritance Tax. The marriage exemption can also be combined with your £3,000 a year Inheritance Tax exemption to allow you to make larger exempt gifts. You can make an Inheritance Tax-free gift of £2,500 for a grandchild’s wedding. Registered civil partnerships attract the same exemptions.
Other points to consider
- Do you have sufficient life assurance cover?
- Do you have critical illness cover?
- Do you have a lasting power of attorney (LPA) in place? To protect you and your loved ones.
- Is your Will up to date? We can help you to ensure your Will is protective and tax efficient.
- What is your IHT exposure?
- Is your estate efficient for IHT purposes?
- Do you have income protection?
- Do you have a “death box” with details of where your financial information is held?
Make a Will/Review existing Wills
If you die without making a Will, your assets will be divided between your relatives according to the intestacy rules. Your surviving spouse or registered civil partner may only receive a portion of your estate, and Inheritance Tax will be due at 40% on anything else above £325,000 (up to £500,000 if the Residence Nil-Rate Band is available).
Leave some of your estate to charity
Where you leave at least 10% of your net estate to charities, the Inheritance Tax on the remainder is charged at 36% instead of 40%. The exact calculation of your net estate is quite complicated, so it’s important to receive professional advice when drawing up or amending your Will.
- Make full use of my 2021/22 ISA allowance
- Maximise available allowances across the family
- Ensure that I am extracting profits from my business tax-efficiently
- Find out how the timing of dividends and bonuses could reduce my tax bill
- Put in place a tax-efficient gifting strategy
- Review and update my pension arrangements
- Re-examine my estate plan and Will
- Send my business and personal records to my accountant in plenty of time!
The Chancellor announced in the October Budget that NIC rates & dividend rates will increase by 1.25%, with effect from April 2022.
Dividend income is taxable in the tax year in which it is legally declared in accordance with company law. Dividends paid are illegal to the extent that the company has insufficient distributable reserves. Backdated dividends are invalid. A dividend does not have to be cash-settled to be legally declared – it could be credited to a loan account for the shareholder to draw down; however, the accounting must correctly reflect this.
Salaries for company owners
There may be a benefit of ensuring a salary is paid of at least the lower earnings limit National Insurance threshold of £6,240, to ensure that credit is obtained for the years contributions towards the state retirement pension.
Furthermore, drawing a salary of up to £9,568 can maximise the use of personal allowances and reduce corporation tax, without payment of class 1 National Insurance contributions.
Director National Insurance is calculated on a year-to-date basis, so a whole year’s salary could be paid in March without additional NI costs, and tax is usually calculated YTD unless you have a month 1/week 1 tax code.
Many of the following apply to the end of the business accounting period year end, which could be different to the tax year end.
Annual Investment Allowances
The Annual Investment Allowance was increased in Budget 2018 from £200,000 to £1m from January 2019. Currently, up to £1m of qualifying expenditure is available for 100% relief in the year it was incurred.
Following a further extension, this higher limit is due to expire on 1 January 2023. It is, therefore, crucial to ensure you take full advantage of this substantially higher rate.
It is always important to review expenditure, which may qualify for Capital Allowances Relief. Alongside plant and machinery, this includes research and development (see below), patents, specific intellectual property and buildings and renovating business premises in specific areas, amongst other items.
There are strict deadlines for claiming capital allowances. Capital Allowances can offer very generous tax allowances of up to 100%, which can result in significant tax savings and these should be considered carefully.
Research and Development Tax Relief
Many businesses miss out on this generous type of relief as they incorrectly believe that they are not eligible to receive it. It is always worth taking advice to review your specific circumstances, to ascertain if you are eligible to claim.
A common misconception is that R&D tax relief only applies to science and technology companies, or those with specialist research and development departments. In fact, all industries can reap the benefits from R&D Tax Relief, providing the project either seek to advance their knowledge, improve a service or product or solve uncertainties in a process.
It is important to review this before the tax year-end as deadlines will apply, dependent upon when the work was completed.
Certain caps on R&D tax relief were introduced for SME businesses in April 2021. In certain circumstances, the amount that can be claimed may be capped at £20,000 plus three times the company’s relevant expenditure on workers. This cap does not apply to companies who are managing intellectual property, or who are creating or preparing to create this, if they do not spend more than 15% of qualifying Research and Development expenditure on subtracting or on the provision of externally provided workers, by connected persons.
Should this apply, our R&D tax team will be able to advice you and agree a strategy to help. More information on how we can help you with R&D tax credit can be found here.
Super-deduction was one of the most useful tax changes for many businesses to be introduced in 2021.
130% capital allowances can be claimed by companies from 1 April 2021, until the end of March 2023, on qualifying plant and machinery investments.
This means that for every pound a company invests, their taxes can be cut by up to 24.7 pence.
Given that this generous tax relief is scheduled to end in March 2023, it would be prudent to take advice now on how to maximise this relief on any expenditure undertaken or planned. this includes exploring the tax benefits of bringing any planned expenditure beyond March 2023 forward to utilise this relief.
IR35 roll out to the private sector
On 6 April 2021, changes came into effect regarding off-payroll working for intermediaries and contractors. These were originally due be implemented in 2020 but were delayed due to Covid-19.
In a nutshell, many private companies that employ contractors are now liable to pay their tax and national insurance contributions if IR35 applies to their circumstances.
IR35 rules are complex and if organisations get them wrong, they risk taking on their contractors’ tax liability, which can be significant, in addition to fines.
From 6 April 2021, all medium or large-sized private sector clients (as well as all public sector clients) will be responsible for deciding their worker’s employment status. This includes some charities and third sector organisations.
If IR35 off-payroll working rules apply, your worker’s fees will be subject to tax and National Insurance contributions. If these are not paid, it will be yourself that remains liable for these charges, not the contractor.
It is important that anyone using contractors or intermediaries is familiar with these rules and has carried out an assessment to determine their workers status. Further information on this can be found here. For assistance on this matter, please contact us.
End of year tax planning for Property Investment Businesses
For residential buy-to-let investors, since April 2020, mortgage interest is only eligible for income tax relief at the basic rate of 20%, regardless of tax bracket.
This may have resulted in increased taxable income, increasing certain thresholds, which could reduce eligibility for child benefit, personal allowance, or pension savings annual allowance, and push some taxpayers into a higher tax band.
For these reasons, it may benefit to consider the merits of setting up a limited company for buy-to-let properties that you hold personally. There may also be Inheritance Tax savings with a limited company.
Corporation Tax is increasing on 1 April 2023 to 25% for larger profits and closely held investment comopanies (for the 2022/23 tax year it will remain at 19%). There will be a taper for medium profits.
Whilst this increase isn’t for another year, it would be frugal to check that this has been included in any cash-flow calculations beyond 2022 and to consider the impact this increase will have on your business going forward.
End of year tax planning – Other items to consider
The tax year-end also provides an opportunity to review your business activities, and to look at ways to be more tax efficient. Other items to consider include:
Is your own year-end date at the most useful point in the year for your company? Would it be advantageous to align this with a key date in your business calendar?
If you trade as a sole trader, a partnership, or an LLP, it is a good point in the year to review your circumstances to ascertain if it would be more tax-efficient to incorporate as a limited company.
Graham is raising as much as he can to beat cancer in memory of his dad.
Cancer is happening right now, which is why he’s raising money right now for Cancer Research UK. There’s no time to lose!
Donate to his page today and help bring forward the day when all cancers are cured.
Donate here: http://bit.ly/graham-marathon
It will be his first marathon on Sunday 3rd April. If he looked this fresh after 3 miles, just imagine after 26.2.
As a Tax Accountant, Graham helps clients minimise their tax liabilities. Because his marathon debut at Manchester falls in the tax year 2021/22, he has thoughtfully entered the London Marathon as well, to provide tax breaks in the 2022/23 tax year.
Donations are tax-deductible for individuals and companies. Individuals should select Gift-Aid to help the charity and higher rate taxpayers can claim relief on their Self-Assessment tax returns.
This is a general illustrative guide only and individual professional advice should be obtained on specific issues. Information is believed correct at time of publication in March 2022.