Use it or lose it - Tax Year End Planning

 It’s that time of year again when you need to consider what allowances you need to ‘use or lose’ before the 5th April 2022.   

We want to ensure you have maximised any allowances available so remember that you have the following allowances and reliefs to consider. Email [email protected] to action any points and they will check the details with the relevant adviser.

1.  Your Personal Allowance

This is the amount of income you can earn without paying any tax and is set at ￡12,570 for the 2021/22 tax year. Ensure you have utilised your personal allowance for this year or transferred unused allowance to your spouse where available under the ‘marriage allowance’ rules.

You can utilise your personal allowance by drawing a pension payment from a flexible pension but remember this will activate the Money Purchase Annual Allowance which impacts what you can put back in to a pension in the future so be careful.

The Marriage Allowance lets you transfer ￡1,250 (for the 2021/22 tax year) of personal allowance from a non/low earner to their spouse (subject to certain conditions).

You can backdate a claim for up to four tax years. For more information see the link below. https://www.gov.uk/marriage-allowance

2.    The Higher Rate Tax Threshold 

This remains at ￡50,000 for the 2021/22 tax year (except in Scotland where the tax rates are different) which means that until you earn more than ￡50,000 you won’t pay higher rate tax and you’ll pay only additional rate tax on income above ￡150,000 (with the exception of the ￡100k trap – see below).

If you are a higher rate taxpayer make sure you are claiming higher rate tax relief back through self assessment each year! You’d be amazed how many people forget.

3.    Pensions

Remember you can personally put 100% of your earned income (not dividends or rental) into a pension subject to the ￡40,000 cap. As a basic rate taxpayer this means you could invest ￡32,000 and you would receive tax relief of ￡8,000 and as a higher rate taxpayer you would get another ￡8,000 in tax relief by claiming through self-assessment, this means the ￡40,000 contribution has only cost you ￡24,000 (higher rate taxpayer) or ￡32,000 (basic rate taxpayer). If you haven’t used your previous three years allowances you can potentially carry some of this forward assuming you have total income of more than your actual contribution when you make it.

For example:

• Client A Earns ￡30,000 in the tax year but has ￡100,000 in cash which they would like to put into a pension, they can only put in 100% of their earnings which is limited to ￡30,000.
• Client B Earns ￡100,000 in the tax year and has ￡100,000 to put into a pension. They can invest ￡40,000 to use this year’s allowance and if they have ￡60,000 of unused allowance from the previous 3 years, they can invest the remaining ￡60,000.
• Client C Earns ￡200,000 per annum and hasn’t invested into a pension in the previous 3 years. They can invest ￡40,000 for this year, plus the three previous years allowances meaning an additional ￡120,000 can be invested equating to a total of ￡160,000 as they have earnings of more than the total payment in the year that the payment is made.

Don’t forget the Lifetime allowance for Pensions is now frozen and currently stands at ￡1,073,100 for the 2021/22 tax year. If you are nearing or over the Lifetime Allowance and haven’t addressed it as an issue, contact us for an initial chat.

a) Pensions and Limited Company Owners: What if I don’t have capacity to pay this amount into a pension but I am a limited company director?

Your company can pay into your pension for you. If the company has the profits needed to support the pension payment and the payment is ‘wholly and exclusively for the purpose of trade’ then they can make the payment on your behalf and receive corporation tax relief as a ‘business expense’. They can also put in the full ￡40,000 even if you take a lower salary. This is even more important as corporation tax rates increase.

Contact our Financial Planners for more information on 01942 889883 or email [email protected]

b) Higher Earners and Pensions

For higher earners, those who earn above ￡100,000, for every ￡2 of income above this threshold you lose ￡1 of your personal allowance which means that when you earn above ￡125,140 (for the 2021/22 tax year), your personal allowance has been completely diminished and you would pay the equivalent of 60% tax on this portion!!!!!

All is not lost, you can get this back by paying into a pension…..

If an individual who earns ￡125,140 pays ￡20,000 net into a pension (￡25,000 gross), they would reduce their tax bill by ￡10,000 (claimed via self-assessment) and they would get ￡5,000 in tax relief into a pension. That is a total of ￡15,000 in tax relief on the ￡25,000 earned above ￡100,000 which equates to 60% relief. Meaning the pension payment has cost ￡10,000 to make ￡25,000. This gets them the personal allowance back (actually you’d need to pay ￡25,112 to get the full allowance but I am keeping the maths simple).  

c) Pensions for Minors and Non-Earners - Give your Grandchild a start on their pension planning!

Did you know that a child can have a pension from 3 months old?

Yes, its true, you can start your child, grandchild, niece, nephew etc on the road to a secure financial future by starting their pension planning early. As a minor, ￡2880.00pa can be invested into a pension per annum which attracts tax relief from the Government of ￡720.00 meaning the total contribution into the pension is ￡3,600pa (Only ￡2,880 from you).

This is then invested and has the beauty of compound returns applied until their retirement age which, if the amount is invested ever year until they are 18, will have a huge impact on their pension planning. As it is in their name, if you were to die it is theirs, no inheritance tax to consider as the ￡2880.00 would be below the annual gifting allowance. (See our give your grandchild a million pound pension poster on this).

This is the same for non-earners, they can invest the same ￡2880.00pa and benefit from the ￡720.00 in tax relief so if you have a spouse that is a homemaker or is off work for whatever reason, don’t let them have a gap in their retirement planning, if you have capacity to do so make sure you utilise this allowance as you cannot get it back.

d) Accessing Your Pension 

If you haven’t utilised all of your personal allowance (￡12,570 for 2021/22), you could draw down on some of your pension in order to maximise this allowance. Current rules allow you to access your pensions from age 55.

Remember when you access your pension in a flexible manner (the taxable element of the plan and not just the tax-free cash) that you activate the ‘money purchase annual allowance’ which means you can only reinvest ￡4,000pa into a money purchase pension which could cause an issue if you are still working and contributing to a pension. Be careful and take advice.

https://www.gov.uk/government/publications/reducing-the-money-purchase-annual-allowance/reducing-the-money-purchase-annual-allowance

Other Allowances and Points to Note

4.    Inheritance tax

The ￡325,000 nil rate band per person remains unchanged and is now frozen for the foreseeable future and the main residence nil rate band is now ￡175,000 per person (subject to a maximum of the value of your house if lower and only if the property is left to a direct descendent – therefore this can be impacted by trusts).

Remember that pensions, if they are set up in the correct way, are outside of your estate for inheritance tax purposes so you may want to consider not drawing on them until you need to and draw on other savings and investments first. 

If you want to ensure your pension passes down the generations then it needs to facilitate successors/dependents/nominees drawdown and not all pensions do allow this. Speak to us to check that your pension is set up in the right way.

Don’t forget that for inheritance tax, you also have an annual gifting allowance of ￡3000 each and other gifting allowances you may be able to utilise which will be effective for inheritance tax planning. You can also use the ‘gifts out of normal expenditure’ rules to pass money to the next generation tax efficiently.

5.  ISAs

The ISA limit for the 2021/22 tax year is still ￡20,000. If you don’t use it, you lose it. It can be invested in cash or stocks and shares ISAs or a combination of both. You can transfer ISAs as well and not lose previous years allowances.  

Remember that children can also have a Junior ISA and can invest ￡9,000pa (2021/22). Also note that with Junior ISA’s the child controls the account from age 16 and can access it from age 18. If your child is 16 or 17 this tax year, they can benefit from both the Junior ISA and the adult ISA (in cash only).

6.    Buy to let Properties

As of April 2020, you are no longer able to deduct any of your mortgage expenses from rental income to reduce your tax bill. Instead, you'll receive a tax-credit, based on 20% of your mortgage interest payments. This is less generous for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments under the old rules.

7.    Dividend Allowance

The dividend allowance remains untouched at ￡2000pa which can be utilised with company dividends as a shareholder for a limited company or via an investment portfolio. If you have shares, an investment account or a limited company then make sure you are taking your allowance and gaining tax free income.

8.    Capital Gains Tax Allowance 

Remember that each individual has a capital gains allowance of ￡12,300 which can utilised against gains from property sales, investment accounts and direct shares to name but a few. If you don’t use this allowance you lose it. Capital gains tax is different for different types of assets and is also one of the lowest taxes, but will it remain so? Assets can be split between spouses to use two allowances so again, ensure you have your assets set up in the most tax efficient way.

Capital Gains can be rolled into certain types of investments (called EIS schemes) to defer the tax payment until later or until death so if you have had a gain in this tax year contact your adviser for more information. For more information on VCT’s and EIS schemes please contact us.

9.    Savings Rate and Starting Rate of tax 

For savings interest (which includes returns from an investment bond) individuals have up to ￡1000 they can earn each year from the savings rate (￡500 for higher rate taxpayers) and for lower earners they also have the ability to utilise an additional ￡5000 in savings interest. This is especially relevant for our retired clients that are utilising different allowances from different portfolios.

10. Losses 

If you have made any losses in previous tax years from income tax or capital gains tax, please ensure your adviser and your accountant know as these may be able to offset gains elsewhere in your portfolio.

11. Tax Efficient Life Cover for Business Owners and Employees 

If you are a business owner, you need to be reviewing your life cover.

Life cover can now be paid for by the business as a tax efficient business expense and can pay out to your family free of inheritance tax by using a Relevant Life Plan. If you haven’t looked at this fantastic product and particularly if your company year-end is approaching, now is the time to review this as making an annual payment for this policy will have an impact on this year’s corporation tax.

Do this whilst you are healthy enough to take out a new policy.

12.                 Venture Capitalist Trusts (VCTs)

Although higher risk than normal investments, VCTs offer a good alternative for higher earners particularly where they have used their Annual Allowance for their pensions. A VCT gives a 30% income tax reducer against income tax due to be paid in that tax year. It has to remain in the fund for 5 years and gives tax free dividends during that time. There are a range of VCTs available with different strategies, risk and track records and there are generally two windows available to invest in a VCT, January to March and then September. This can be alongside a pension strategy for those with a higher risk appetite.

Remember if you don’t use your allowances you may lose them so it is vital that you have your savings, pensions and investments arranged in a way to maximise your available allowances in line with your personal circumstances.

For further information on any of the above, please speak to your adviser, contact KBA to book a meeting on 01942 889883 or email [email protected]

Sarah Hogan, Chartered Financial Planner