Tax Tips: Year-end Tax Planning
The end of the financial year, 31 March, is fast approaching. The question is whether you have made the most of the tax allowances available to you? Here are 6 tax tips to help you make the most of the tax savings available before the deadline.
Tax Tip 1: Your ISA allowance: use it up!
To help maximise the benefits of ISAs for you and your family, here are four pointers when planning for the year ahead:
If you are in a position to it makes sense for you and your spouse to take advantage of each other’s ISA allowance if neither of you are fully utilising your annual ISA allowance of £20,000 each per tax year, particularly if one of you has more financial resources than the other.
16- and 17-year-olds actually get two ISA allowances as they’re able to open a Junior ISA, which for 2020/21 has a limit of £9,00 and an adult cash ISA. This means that you can put away up to £29,000 in your child’s name tax free this tax year.
People aged 18-39 can open a Lifetime ISA (LISA), which entitles them to save up to £4,000 a year until they’re 50. The government will top up the savings by 25%, up to a maximum of £1,000 free cash per tax year.
REMEMBER:
Some cash and stocks and shares ISAs are flexible so you can take money out and replace it within a tax year without it affecting your allowance. But not all are, so please check your terms and conditions.
Tax Tip 2: Consider topping up your pension
Normally you can pay a maximum of £40,000 into your pension in a tax year as an individual or via your limited company before it becomes subject to tax, otherwise known as your annual pension allowance.
Other considerations to make the most of your full pension allowance in a given tax year:
If you don't manage to make full use of your £40,000 pensions annual allowance this tax year you can carry it forward for up to three years.
You can also boost your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs).
Everyone is entitled to a tax-free Personal Allowance. This is the amount of income you don't pay any income tax on, and for 2020/21 stands at £12,500. But you begin to lose this when you earn over £100,000 (and you don't get anything if you earn £123,000 or more). However, by upping your pension contributions, you could get some of your allowance back, as the income on your tax return will be lower to take your extra pension contributions into account.
Tax Tip 3: Limiting inheritance tax
You can act at any time to help reduce a potential inheritance tax (IHT) bill in your lifetime and on your death.
One way you can do this is by giving away up to £3,000 worth of gifts, such as money or possessions, each tax year, so they are no longer included when the value of your estate (property, money and possessions) is calculated. This is known as the annual exemption.
An IHT bill only applies if your estate is valued above £325,000.
The exemption applies to individuals, so you can make £6,000 worth of gifts as a couple.
It can also be carried forward for one year so if you didn’t do this last year then you can, as a couple, make £12,000 worth of gifts before 6 April 2021.
Tax Tip 4: Making charitable donations
Will you be donating to any worthy causes this tax year?
If you are, you can receive full tax relief on your contributions through Gift Aid, or straight from your wages or pension via Payroll Giving.
If you’re a higher rate taxpayer, i.e. if you pay 40% or 45% tax, you can claim back the difference between the tax on your donation and what the charity got back.
If you don’t usually Gift Aid your charitable donations, it’s certainly worth considering as charities can claim an extra 25p for every £1 you give, and it doesn’t cost you a thing.
Charities will normally provide you with a form to fill out to declare you’d like Gift Aid to be claimed on your gift. If you haven’t got one, the charity will happily supply it.
Tax Tip 5: Capital gains tax allowance
Capital gains tax (CGT) is a tax on the gains, in other words the profit you make, when you sell something, such as an investment portfolio or second home.
But everyone has an annual allowance before CGT applies of £12,300 (in 2020/21). Like the ISA allowance, it doesn’t roll over, so if you don’t use it you’ll lose out and may have to pay more tax in the future.
Also, it’s worth remembering the allowance is for individuals, so couples have a joint allowance for 2020/21 of £24,600. You could, for example, consider transferring an asset into your joint names so you both stay within your individual allowances.
Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks and Shares ISA could be for you. Just like any investment, it carries risk but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.
Tax Tip 6: Your dividend allowance
If you receive dividends outside of a Stocks and Shares ISA, or you’re a company shareholder or director, you can currently receive £2,000 worth of dividends free of income tax. This allowance reduced from £5,000 on 6 April 2018.
Hopefully you can make use of one or more of these tax pointers and ideally before the end-of-tax-year dash!
