The end of the 2020/21 tax year on the 5th April 2020 is fast approaching so Helen Thomas, one of our Chartered Financial Planners takes a look at some of the allowances that you may want to take advantage of to reduce your bill, boost tax efficiency and provide security for future generations…
1. Making your existing savings and investment more tax-efficient
Your ISA Allowance
ISAs are tax efficient as growth and income is tax-free. They can deliver a tax-free cash-flow and are inheritable by spouses. All of these factors make ISAs an important part of everyone’s planning – whether you’re starting to build your savings or are decumulating from your funds.
The ISA allowance remains at £20,000 per adult for this year and can be split between cash and stock and shares ISAs. This means that a couple can save or invest up-to £40,000 this tax year.
Capital Gains Tax allowance
Capital gains tax is a tax on the profits you make from selling things such as a second home or personal possession over £6,000, except your car. The tax-free allowance for this year is £12,300 per person.
If you don’t use this allowance – you lose it but you can carry forward past losses. We refer to the use of this allowance as ‘annual tax harvesting’ and it is part of our investment process. It’s really important that you tell us about any gains or losses that you make outside of our planning so we can factor this in.
This allowance is currently at £2,000 for this tax year so it means that the first £2,000 of dividends you receive are tax-free. Structuring a portfolio to make use of this allowance is a good idea when you’ve made use of the ISA allowance.
2. Saving for the future… and possibly reducing your income tax bill
Making a personal pension contribution is a great way to reduce your income tax liability whilst also putting money away for retirement. A contribution of £8,000 will automatically receive basic tax relief of £2,000 in the pension. If you are a higher or additional rate tax payer then you can claim an additional £2,000 or £2,500 via your tax return. Contributions from your employer or via your business can also be made and can attract corporation tax relief.
If you are a member of a registered pension scheme and have earnings from employment or self-employment you may be able to make use of the full £40,000 annual allowance. In some circumstances, you can also carry forward allowances for up to three years.
Care must be taken here for higher earners as the annual allowance i.e. the amount you’re allowed to put in each year, is restricted for earnings over £240,000. You must also keep in mind the lifetime allowance which restricts the total amount you can have in a pension over your lifetime. We are always happy to help you work out your pension funding scope.
3. Reducing your income tax bill… and adding another tax wrapper to your portfolio
Enterprise investment scheme (EIS)/Seed Enterprise investment scheme (SEIS) / Venture Capital Trust (VCT)
For those who are restricted on pension funding, investment in EIS/SEIS/VCTs can also offer valuable income tax benefits and can have other longer term tax advantages. They do carry more risk however and are not suitable for everyone. If this is of interest to you, please do call us for further information and guidance.
4. Reducing your income tax bill… and creating a legacy
We’ve probably all ticked the box for Gift Aid but possibly forgotten about it by the time we come to doing tax returns.
A donation of £1,000 will mean that the charity can claim £250 in gift aid. You then can add in £1,250 on your return and if you’re a higher rate tax payer then you can claim a further 20% tax relief resulting in a tax saving of £250. This means that the actual cost of the gift will be £750 to you with the charity receiving a lot more!
Note: Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April). The tax could have been paid on income or capital gains.
We are privileged to be able to support our clients in achieving their philanthropy goals. If you need help planning your gifting, or would like to know more about setting up your own Family Foundation to direct your giving to causes that are important to you, please do not hesitate to get in touch.
5. Helping to provide security for future generations
The JISA is very similar to the ISA but only available to children under 18. You can save or invest (or a mixture of both) up-to £9,000 this tax year for your children or grandchildren. A JISA cannot be accessed until a child is 18 but then can be converted into an ISA for future investment or to help fund University costs or get them onto the property ladder.
Inheritance tax-free gifting
The current inheritance tax threshold is £325,000 per person or £650,000 for married couples. Anything over that amount will be taxed. By doing some planning now, you can really make a difference to your inheritance tax position in the future.
Inheritance tax planning can include making use of your ‘annual exemption’ which allows you to give away £3,000 worth of gifts each tax year and this allowance can be carried forward for one year.
Another option is to make regular gifts out of surplus income. You can make any gift you want but it must be intended to be made regularly and must be out of surplus income. Good record-keeping is essential here as otherwise, gifts are added back into your estate.
Inheritance tax planning can be complicated, we are on hand to give you guidance and we will look at your AIMS to help guide you through.
6. The budget…
With a budget scheduled for 3rd March 2021, we do expect some changes in the coming tax year and it is possible that allowances and reliefs could be reduced. As ever, we will be ready to provide guidance.
If you want to know more about the tax relief and allowances mentioned above, please call us on 01704 571777 or email us at email@example.com and one of our team will be happy to help.