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End of year tax planning tips 2020/21

End of year tax planning tips 2020/21

Tim Woodgates

As we approach the end of the 2020/21 tax year, now is the ideal time to make sure you are making use of all the available allowances to benefit your overall tax position.

Personal allowance
The personal allowance amount of £12,500 begins to get restricted when income levels exceed £100,000 such that no personal allowance is available to those earning over £125,000.  Planning measures can ensure that the personal allowance is preserved by making pension contributions or Gift Aid donations to bring the total income down beneath the relevant thresholds.  This is especially valuable considering that the marginal rate of tax on income between £100,000 and £125,000 can be as much as 60%.

Pension contributions
A taxpayer can make pension contributions each year up to the annual allowance of £40,000.  There is also opportunity for additional contributions however as any unused amounts from the prior three tax years can also be used provided that the taxpayer was a member of a UK registered pension scheme in those tax years.  The current year’s allowances are always used first and then any unused allowances from the earliest year of the three previous years can then be accessed.

We recommend that where possible pension contributions are made to ensure that the available allowances for the most historical year (2017/18 in the case of 2020/21) are used as they will be lost once the tax year 2020/21 expires.

Any contributions made are limited to your net relevant earnings (i.e. salary, self-employment profit or trading partnership profit share).

Personal pension contributions will have the effect of increasing the thresholds where higher rate and additional rate taxes apply.  Therefore careful planning of pension contributions can be made so that the more punitive rates of tax are avoided.

Use of capital gains annual exempt amount
UK taxpayers have an annual exemption amount each year to offset against any capital gains that are made.  The amount for 2020/21 is £12,300 and any unused allowances can’t be carried forward.  It is therefore sensible to consider selling assets and investments ahead of the end of the tax year to realise capital gains such that the annual exemption is used.

For married couples or civil partnerships, any transfers of assets between spouses/civil partners are dealt with on a nil-gain/nil-loss basis.  This means that ahead of any third party sale, it may be advisable to transfer a proportion of the asset concerned to a spouse/civil partner to ensure this annual exemption is utilised, and indeed maximise any use of capital losses that may be relevant.

Utilise dividend/interest nil rate bands effectively
For 2020/21 the first £2,000 of dividend income for any UK taxpayer is tax free. While this amount is still included within your taxable income, no Income Tax is charged. If your spouse/civil partner is not using their dividend allowance you may wish to consider transferring some shares to benefit from this (this could save a higher rate taxpayer up to £650 tax per annum).  A similar relief exists with Basic Rate taxpayers being able to receive up to £1,000 Income Tax per annum. This is reduced to £500 for Higher Rate taxpayers.  Additional Rate taxpayers are not entitled to this relief.  Spouses/civil partners can take action to ensure that these reliefs are maxmised.

The ISA investment limit for 2020/21 is £20,000 and this can be invested in any combination of cash ISAs or stocks and shares ISAs.  Any investments within ISAs grow completely free of income tax and CGT charges so they are an extremely tax efficient method of investing.  ISA allowances can’t be carried forward so wherever possible it is advisable to try and ensure that these are utilised before the end of tax year 2020/21.

There is an annual exemption for IHT purposes of £3,000 each year.  If the prior year’s annual exemption for IHT was not fully utilised, any unused amount can be carried forward for up to one year.  Assuming the allowance for 2019/20 was not used, it means that £6,000 can be gifted away during 2020/21 free from any IHT charge.

Tax efficient investments
Investments into EIS, SEIS and VCTs can received very favourable income tax and CGT advantages.  If the investments are held for the requisite period of time, any capital gains on these investments are also free from CGT charge.  There is also the potential to defer any CGT arising on any other assets realised in the year of a qualifying investment.  These forms of tax efficient investments have annual limits in terms of the income tax relief that can be obtained each tax year: EIS £1,000,000 (with 30% income tax relief); SEIS £200,000 (with 50% income relief); and VCT £200,000 (with 30% income tax relief).

With regards to pensions and investments, advice should always be taken from an appropriately qualified professional who is regulated by the FCA.

For further tax planning advice, please contact your nearest Moore office.