Tax year-end planning: Things to consider

Make use of your pension allowance 

You can pay up to £40,000 into your pension each year. You can also carry forward any annual allowance you didn’t use up from any of the previous three years.

However, the annual allowance could be reduced as low as £4,000 due to the ‘Tapered Annual Allowance’ if you are a high earner or have flexibly accessed your pension. Careful consideration should be given as tax relief may not be available should you exceed your available allowances or your contributions exceed your net relevant earnings.

It’s also important you consider making these pension contributions direct from your company as this will help reduce your corporation tax on profits and save tax on the amounts drawn.

Taking action ahead of National Insurance and Dividend Tax changes in April 2022

From 6 April 2022 all National Insurance and Dividend tax rates are increasing by 1.25%.

While this isn’t a big increase in itself it is still an increase in tax that would mean bringing forward drawings to the 2021-22 tax year could have a marginal advantage, provided it doesn’t push you into a higher tax rate bracket.

If you are already a higher rate tax payer, say your taxable earnings are around £65,000 per year, and you are wondering about drawing an additional £10,000 dividend from your limited company in the next 6 months, drawing this before 5 April 2021 will save £125.

If you are looking at staff bonuses, then paying these in March would save 1.25% national insurance for the business and an additional 1.25% tax for the employee.

Pay into your spouse’s or child’s pension

You can give a head start to children or a non-working spouse and set up a pension plan for them. You can pay up to £2,880 each tax year which will receive 20% tax relief from HMRC and will top up their pots to the maximum £3,600 each year.

Make the most of your Individual Savings Account (ISA) allowance

You can pay up to £20,000 across your ISAs (if you’re a couple, that’s £20,000 each), including cash ISAs, stock and shares ISAs and lifetime ISAs, which will then grow tax free subject to certain conditions.

These valuable tax efficient allowances are an important step to creating wealth in the future, so don’t let them go to waste.

Use up your Lifetime ISA allowance

You can pay up to £4,000 every tax into a Lifetime ISA and earn a 25% bonus from the government on it (if you save the maximum, you’ll get a bonus of £1,000 every year).

If you haven’t already opened one, you can only do so before turning 40, and continuing paying (and earning the bonus) until you turn 50. You can use this to go towards buying a house or retiring.

Keep in mind this £4,000 goes towards your annual ISA allowance, which for the 2021/22 tax year is £20,000.

Pay money in your child’s Junior ISA

For each child, you can pay up to £9,000 into a Junior ISA for the 2021/22 tax year. Anyone can pay into it, but it must be set up by someone with parental control.

Utilise your Capital Gains Tax (CGT) allowance

CGT is charged on profits made when certain assets are sold or transferred. You pay tax on the gains made above your annual tax-free CGT allowance, which for the 2021/22 tax year is £12,300.

To take advantage of it, you may want to think about selling some of your assets by 5th April, as unused allowances cannot be carried forward.

You could also gift assets to your spouse tax free before a disposal to make the most of their CGT allowance or perhaps if they pay a lower rate of CGT.

Make gifts and reduce your Inheritance Tax (IHT) Bill

IHT is charged at 40% on estates over £325,000, with an extra £125,000 given against main residences left to direct descendants. Each tax year, there are a number of IHT allowances that are tax year sensitive. Using them can reduce any potential IHT bills payable on your death. Each tax year you can:

• Gift up to £3,000 using your ‘gift allowance’. If you don’t use your full gift allowance, you can carry the remaining forward one year
• Gift up to £250 per person
• Gift £5,000 to a child getting married, or £2,500 to a grandchild

Other gifts exceeding the above values can be given IHT free if the giver survives for at least 7 years post date of the gift, careful planning may be needed to meet the IHT free requirements.

Consider your options as a high earner

If you’re a high earner (over £50k), consider making additional pension contributions or charitable gifts, to extend your basic rate tax band. This will reduce the amount of tax due at higher rate whilst also help to prevent the child benefit being lost if one parent in the household earns over £50K.

For those with income in excess of £100K, in addition to general tax savings such contributions could also help to recover some of the tax free personal allowance lost when earnings exceed these levels.