As we approach the end of the tax year on 5 April, now is a good time to review your tax position. Many allowances are calculated on a tax yearly basis, so a review before the tax year end can help to identify any potential tax savings for you and your family.
ISAs: a limited opportunity for tax-free investment
You can consider making tax-free investments through National Savings or ISAs. The annual ISA subscription limit for 2021/22 is £20,000, and this limit cannot be carried forward if not used. Consider Junior ISAs for children under 18 (2021/22 limit £9,000). Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As ISA income is not taxable, this allows you to give cash to your children without having to pay tax on the income generated.
Pension contributions – using your annual allowance
Pension contributions are still a really tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of your annual allowance and what is known as your net relevant earnings. You may also be able to take advantage of any unused annual allowance from the three previous tax years to make additional pension contributions. This is quite a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so you should take advice before making contributions. We can put you in touch with a relevant specialist.
Tax on your savings - sharing with your spouse
Some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and everyone has an allowance of £2,000 for dividend income. Savings and dividend income falling within these bands is taxed at 0%. There is also a personal savings allowance, which is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers. Spouses and civil partners can review who holds any savings that generate taxable income to ensure these allowances are used efficiently.
Giving to charity can also save you tax
If you pay tax at the 40% rate or higher, you may be able to claim tax relief on gift aid donations you make to charity.
Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate as this can increase the income tax relief.
You can also gift quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from capital gains tax.
Capital gains tax – it’s all about the timing
As capital gains tax is charged when an asset is sold, you have some control over when to pay it. If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is £12,300 in 2021/22. Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses.
Crystallising unrealised losses to offset gains may also be an option. You can consider selling an asset which stands at a loss, or making a ‘negligible value’ claim on assets that currently have no value.
You should take tax and investment advice in advance.
Inheritance tax – know your allowances
Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years. This £3,000 annual allowance can only be brought forward for one tax year, so if you have assets to spare you may want to consider using up this and last year’s allowance before 5 April. The current year’s allowance is automatically used first. It is per donor, not per recipient, so a married couple can make gifts independently.
The 60% tax trap
The highest rate of tax is 45%, and this applies to individuals with total income over £150,000. However, personal allowances are tapered for individuals with income between £100,000 and £125,140 (2021/22), and this gives an effective tax rate in this band of 60%.
If you are affected by this, tax planning can help to reduce the 60% rate. You could consider the following, which may also help more generally to reduce your tax bill:
- making pension contributions or charitable gift aid payments;
- transferring income-generating assets between spouses/civil partners if possible;
- using tax-free investments and/or tax efficient investments;
- investing in assets which generate capital growth rather than income; and
- altering the timing of income to maximise use of lower rate bands.
Making tax-efficient investments
Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments may provide tax relief and the opportunity to defer capital gains.
These investments are considered higher risk and are not suitable for everyone. Please see the Important information below*.
We can put you in touch with a specialist for advice on these.
The health and social care levy: would accelerating income help?
The tax rate on dividends is increasing by 1.25% in each rate band from 6 April. If you pay yourself a dividend from your company, you should think about the timing. A slightly higher dividend before the tax increase may save tax overall, although it will bring forward the deadline for paying the tax liability. There are also other factors to consider such as your overall tax rate each year and the company’s position.
The value of an investment, and the income from it, may go down as well as up and you may get back less than you originally invested.
*Tax efficient investments such as VCTs, EISs and SEISs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years.They should only be considered once other planning opportunities have been fully explored and they should form only a small part of the client’s portfolio.Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and you must carefully consider the risk warnings contained in that prospectus.
How we can help
Should you need help reviewing your tax position or advice on any of the points discussed, please contact your usual Smith & Williamson contact or Adam West.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.