As the 5 April end-of-tax-year deadline fast approaches, it can be really easy to just put off tax planning – you’ve got plenty of time, right?
Well, it’s only a few weeks away, and we’d argue that you can never be too prepared.
Plus there are plenty of things you can do that would potentially reduce your tax bill, or allowances that you haven’t yet made use of.
Let’s take a look at just a few of the tax efficiencies that could really benefit you.
Pension contributions provide Income Tax relief at your Income Tax rate you pay on your income.
For the 2021/22 tax year, you can pay either up to £40,000 a year or 100% of your salary (whichever is the lower) – this is known as the pension annual allowance. Note that this allowance is before any employer or work related contributions though.
If you’re a higher-rate taxpayer you can get 40% tax relief – basically every £80 paid in, the Treasury will top up with £20 and you will get back £20 in tax relief direct to your bank account, giving you a nice even £100 addition to your pension.
If you sit in the ‘60%’ tax bracket between £100,000 and £125,140 – where you gradually lose your personal tax allowance – £80 paid into your pension will save you £60 in tax overall – including £40 back through self-assessment.
The deadline on this is reasonably lenient – you have three years from the given tax year to complete this process if you don’t make full use of your allowance. So the deadline for 2018/19 would be the upcoming 5 April, although you will need to use up your 2021/22 allowance first before using up previous years’ unused allowances.
Note that if you have your own limited company, making an employer’s contribution is usually even more tax efficient and can be a very tax efficient way of extracting excess cash from your company.
It’s ‘use it or lose it’ time as far as making use of the £20,000 annual ISA allowance before 5 April is concerned.
As a potential first-time buyer of a house or someone who is looking for a government-incentivised way of saving some money, an ISA can be a brilliant way to start.
So long as you’re between 18 and 40, it’s possible to put up to £4,000 (out of the £20,000 annual ISA allowance) into a lifetime ISA which receives an annual government bonus of up to £1,000 a year on maximum contributions.
If you’re younger than 18, but over 16, then you’ll have to use a cash ISA rather than stocks and shares.
Cash ISAs are more flexible in terms of having access to your money if you really need to, whereas stocks and shares ISAs are more designed for investing over a length of time.
It may be worth discussing what ISA options are best for you and your family – these aren’t decisions to be discussed on a whim.
But if you do so before the 5 April deadline then you’ll maximise your allowance for the current tax year before they are reset on 6 April.
Capital gains tax
Another way to reduce your tax bill is to take a look at your capital gains tax situation.
After the first capital gains of £12,300 per year (something that has been frozen until 2026), you’ll might have to pay tax on anything over that.
However, if you’re in a married couple for example you may be able to gift an asset to your spouse before it is sold, and thus not pay any tax on said item if they have not made any capital gains themselves.
Paying inheritance tax is the bane of anyone who has amassed a decent wealth within their lifetime.
Usually, it’s due at a rate of 40% on the portion of your estate that exceeds £325,000 but this can vary in certain circumstances.
If you’re leaving the family home or share of the property to a direct descendant, there is an extra tax-free threshold of £175,000 – £500,000 in total. This is doubled if you’re a married couple.
You can gift up to £3,000 a year reducing the value of your estate in the process. This amount can only be carried forward for one tax year, so you best make use of it before the 5 April 2022 deadline. In addition, you can also make any number of small gifts of up to £250 per recipient in a tax year (one gift per recipient per tax year) without any tax implications.
It might be worth updating your will and assessing your executors, especially if your circumstances have changed in 2021/22. Are they going to understand and carry out your wishes to the standards you deserve?
Talk to us
It’s always best to speak to a professional before doing any of this. If you need our support with anything we’ve discussed in this article, want to get your tax under control, or you’re just looking for some simple advice, get in touch with us today.