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End of Year Tax Planning
While the media has offered us plenty of doom and gloom since COVID-19 hit, a recent Financial Conduct Authority report shows that things are far more positive than they would have us believe. Nearly half (48%) of adults surveyed have not been impacted financially by COVID-19 while one in seven (14%) have seen their financial situation improve.
That being said, the report also highlights that the pandemic has left more than a quarter of UK adults with low financial resilience, meaning low level of savings or erratic earnings. These numbers have increased over the course of 2020 from 10.7 million to 14.2 million.
In the light of such findings and as the tax year end approaches, now is the time to make some savvy choices and make the most of your money moving forward. Regardless of the pandemic, the tax year end is always a good time to review your finances, consider your short- and long-term goals, and identify tax planning opportunities.
Have your taxes gone up following the Budget?
The Spring Budget saw Rishi Sunak announce some major changes. These include keeping the personal allowances for income tax at their current levels until the end of the 2025-26 tax year. He has also announced plans to freeze the tax-free thresholds for inheritance tax liabilities and pension allowances, also until 2025-2026.
Passing your estate to your spouse is one option to handle your IHT liability. Alternatively, you can arrange for your estate to be passed on to your children as long as seven years elapse before the estate owner dies. If this length of time has not passed and there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die, while gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’. You may also wish to consider passing other income-yielding assets to your spouse, as long as they earn a lower income than you.
To this end, you should also make the most of your personal allowances within a marriage or civil partnership where one person pays a lower tax rate, meaning there may be opportunities to structure things in a more tax-efficient way. One popular opportunity is for those couples receiving taxable rents from buy-to-let properties – if the lower earner is on a basic rate of tax, they should be the one to receive the rental payments.
You should also use your annual tax-free allowances when making financial gifts – any individual can make an annual gift of £3000 which won’t be taken into account when calculating your inheritance tax bill.
Consider your Pension
With so many of us saving more than usual due to the impact of lockdown and the drastically reduced cost of day-to-day living, it could be a wise move to increase your pension contributions and make the most of the generous pension tax relief structure before tax year end. Investments in your pension are free from income tax and capital gains tax, You can also take advantage of company salary sacrifice schemes to reduce your income tax.
You may also be able to take advantage of the carry forward option and bring forward unused allowance from the previous three tax years – click here to read more about these opportunities. We also recommend being informed of the tax relief opportunities associated with the lifetime allowance and tapered annual allowance such as tax protection from HMRC, which you can read about in detail on our recent blog post. Other ways to reduce your income tax rate are to make Gift Aid payments or defer income to a later tax year.
Make the most of ISA tax-free allowances
Paying additional money into an existing ISA is also an effective way to make the most of your savings. In this tax year, you can currently save up to £20,000 across your ISA products completely tax-free but this doesn’t carry over to the next tax year so be sure to make the most of it.
Take some time to work out whether you wish to put your money away for short- or long-term financial ambitions; this will help you to decide what type of ISA is best for you. Different ISAs come with different levels of risk and return but regardless of your choice, your money will grow income and capital gains tax-free and will not be taxed when withdrawn.
If you are a higher-rate or additional rate taxpayer, you may wish to explore options such as Venture Capital Trusts and the Enterprise Investment Scheme. While these do come with a level of risk, they also provide generous income and capital gains tax breaks that will reduce your tax liability.
Taking advantage of year-end tax planning is just one component of an effective financial planning strategy. You should speak with a professional adviser to consider other important ways to protect yourself and your financial wellbeing, such as income protection, life insurance and establishing an up-to-date and tax-efficient Will. Contact us today to find out more.