Tax Planning

Tax Nook: 12 months-end tax planning methods

QUESTION: The end of the tax year is almost approaching, what tax planning strategies should I be considering?

ANSWER: There are just over three weeks until the UK income tax year ends on April 5, and there is still time to undertake some last-minute planning to ensure all available reliefs are utilized or to mitigate against a potential tax bill.

Currently, every UK taxpayer has a basic rate band of £37,700 with income generally taxable at 20 per cent. Individuals are also entitled to a tax-free personal allowance of £12,570 which means that you can earn up to £50,270 before the higher rates of tax will apply. The higher rate of tax, usually 40 per cent, applies to income over £50,270 with the additional rate band, usually 45 per cent, applying to all income over £150,000.

When an individual’s income exceeds £100,000, their personal allowance is reduced by £1 for every £2 over £100,000. This phased reduction of the personal allowance means that income between £100,000 and £125,140 is effectively taxed at a rate of 60 per cent.

Generally, an individual is entitled to make £40,000 pension contributions each year. Any unused pension allowance from the previous three years can increase this amount.

However, the pension allowance is restricted if an individual’s relevant net earnings, not including dividends, is lower than £40,000 or if an individual’s total earnings, including dividends, exceed £240,000. Please note that a Pension Savings Charge may arise if an individual pays too much into their pension during a tax year.

Pension contributions can extend to an individual’s basic rate and higher rate band in the tax year when made. In addition, they can extend the £100,000 threshold before an individual’s personal allowance begins to be reduced. Independent financial advice should always be sought before making a pension contribution.

It is also worth noting that donations made under Gift Aid can extend an individual’s tax bands in the same way as pension contributions.

If an individual’s adjusted net income exceeds £50,000 and they, or their partner, are in receipt of UK Child Benefit, then they need to consider whether the High Income Child Benefit Charge applies. “Adjusted Net Income” means total taxable income after deducting certain reliefs (including personal pension contributions and Gift Aid donations) but before deducting the personal allowance.

If the charge applies, an individual must repay one per cent of the total Child Benefit received in a tax year for every £100 they earn over £50,000. Once an individual’s adjusted net income exceeds £60,000, they must repay the full amount of Child Benefit received. If the Charge applies for 2021/22, an individual must file a Self-Assessment Tax Return and pay their liability by 31st January 2023.

Individuals are currently entitled to a tax-free dividend allowance of £2,000. Shareholders, particularly in family companies, should consider maximizing this relief before the end of the tax year as this cannot be carried forward if not utilised.

Every individual is also entitled to a Capital Gains Tax (CGT) annual exemption of £12,300, which is unable to be carried forward. Married couples should consider moving assets into joint name prior to sale, as this is tax-neutral for CGT purposes, and means that two annual exemptions can be relieved against the gain.

For 2021/22, the maximum that you can invest in an Individual Savings Account (ISA) is £20,000. ISA’s can be very tax efficient as income which arises on ISA investments is exempt from income tax and any capital gains are exempt from CGT.

There are also several Government-approved tax efficient investments, including National Savings, Enterprise Investment Scheme, Seed Enterprises Investment Scheme and Venture Capitals Trusts scheme. There are a number of conditions which must be met for tax relief to be available under the above schemes and independent financial advice should be sought prior to making an investment.

Parents could also consider making gifts for inheritance tax purposes. Each year an individual has an IHT annual exemption of £3,000. If this allowance is not used, it can be carried forward for a single tax year before being lost.

Finally, sole traders and partnerships with significant business profits and are exposed to the higher rates of income tax and national insurance contributions should consider whether to incorporate their business as UK corporation tax is currently charged at 19 per cent.

Feargal McCormack (f.mccormack@pkffpm.com) is managing director of PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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