Five things to consider before the end of the tax year
The end of the current financial tax year is fast approaching, which means now is the time to review finances and make sure you are taking advantage of all the tax planning opportunities available. We’ve listed five things to consider before the end of the tax year.
1. Maximise tax relief on pension contributions by using all the annual allowance.
Pensions are one of the most tax-efficient ways to save for longer-term futures. The annual allowance for 2020/21 is £40,000, but you can also use surplus allowance from the previous three tax years. Annual allowances may be restricted to a maximum of £4,000 where total income plus employer pension contributions for the year exceeds £240,000, and total income less employee contributions exceeds £200,000.
For every £80 paid in, pension providers can claim another £20 in tax relief from the government, so that a £100 contribution costs just £80. Then, for higher rate (40%) or top rate (45%) taxpayers, they can claim up to an additional £20 or £25 respectively, making the effective cost of a £100 contribution from members, as little as £60 or £55. There is a key difference in how higher and top rate taxpayers claim tax relief, however. While 20% is reclaimed at source by pension providers, which works for basic rate taxpayers, for higher rate taxpayers higher rate relief can be claimed via self-assessment or by contacting HMRC but for top rate taxpayers the additional amount must be reclaimed through a self-assessment tax return and will reduce overall tax liability at the end of the year. For higher rate taxpayer employees, an alternative to reclaiming the extra through a self-assessment return is to ask HM Revenue & Customs (HMRC) for PAYE notice of coding to be adjusted. This way, tax relief is given through a new PAYE code that lowers the tax paid via PAYE.
Are you an employer looking to help your high earners avoid an unwanted tax charge?
2. Taking advantage of the individual savings account (ISA) investment limit to generate tax-free income and capital gains.
An ISA allows people to save or invest money in a tax-efficient way. An ISA is a tax-efficient savings or investment account that allows savers to put an ISA allowance to work and maximise the potential returns, by shielding it from Income Tax, tax on dividends and Capital Gains Tax. The maximum annual amount that can be invested in ISAs is £20,000 (2020/21). You can allocate the entire amount into a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA, or any combination of the three (and/or some to a Lifetime ISA if eligible – see below).
3. Start planning for a first property or retirement.
A Lifetime ISA (LISA) is a dual-purpose ISA, designed to help those saving for a first home and/or retirement. Those aged 18 to 39, can open a Lifetime ISA and save up to £4,000 tax-efficiently each year up to and including the day before their 50th birthday. The government will pay a 25% bonus on contributions, up to a maximum of £1,000 a year. Lifetime ISA allowance forms part of the overall £20,000 annual ISA allowance. You can withdraw savings from age 60 onwards, if not used to buy a home before then. A penalty of 25% may be applied if you withdraw from your LISA for other purposes.
4. Contribute up to £9,000 into a child’s junior individual savings account (JISA).
A Junior ISA is a long-term savings account set up by a parent or guardian with a Junior ISA provider, specifically for their child’s future. Only the child can access the money, and only once they turn 18. There are two types available: a Cash Junior ISA and a Stocks & Shares Junior ISA. The current annual subscription limit for Junior ISAs is up to £9,000 for the 2020/21 tax year. The fund builds up free of tax on investment income and capital gains until your child reaches 18, when the funds can either be withdrawn or rolled over into an adult ISA. Any child with a Child Trust Fund (CTF) can’t open a JISA unless they first transfer the CTF to a JISA and close the CTF – alternatively £9,000 can be paid to the CTF.
5. Plan your capital gains to make best use of any capital losses.
The £12,300 (2020/21) allowance is a ‘use it or lose it’ allowance. Savers can’t carry it forward to future years. But remember that everyone has their own allowance, so a married couple can potentially realise gains of £24,600 this tax year without incurring any tax liability. If appropriate, as transferring assets between spouses or registered civil partners is tax-free, it might make sense to consider transferring holdings to a spouse in a lower tax bracket or one who has not used their allowance (providing the transfer is a genuine and unconditional gift). Gains and losses realised in the same tax year must be offset against each other, and this will reduce the amount of gain that is subject to tax. If losses exceed gains, it is possible to carry them forward to offset against gains in the future, provided the losses have been registered with HMRC.
Don’t delay and leave it to chance!
When it comes to tax, knowing how best to manage finances can be a complex task. It is important that your people get it right, not only because of the financial benefits, but because getting it wrong can have serious consequences. Your people need to feel comfortable to discuss their situations, and not to delay and leave it to chance.
Get in touch if you want to talk through any challenges you may have. We have a range of solutions.
Talk to one of our friendly experts on how we can help your people with tax planning.
Tax laws are subject to change and taxation will vary depending on individual circumstance.
The value of investments and income from them may go down. You may not get back the original amount invested.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment and is not normally accessible until age 55 (57 from April 2028).
Past performance is not a reliable indicator of future performance.