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Year end personal tax planner

As the end of the tax year approaches, it is now the time in which you should consider whether any opportunities remain to mitigate your 2020/21 tax liabilities.

Our letter sets out the potential opportunities still available to you between now and 5 April 2021, and considers the changes which that already been announced which could affect your 2021/22 tax position. We then consider the future changes that have been announced in the Chancellor’s latest Budget Statement.

These notes are written in general terms in order to be of the widest possible use, and it is important therefore that specific advice is sought in relation to your own individual circumstances. Rates and allowances quoted do not refer to the different Scottish and Welsh tax rates.

This has been an extraordinary year, and although we do refer to Covid-19 in these notes, we have provided our clients with a separate, more targeted analysis of the various Covid-19 support measures. 

Please approach one of the tax team at Butler & Co should you require any further information. For investment advice, we always recommend that your particular circumstances are examined by an Independent Financial Adviser (IFA). We can’t give investment advice but where appropriate we can recommend a range of IFAs to match your needs and we would be happy to make an introduction should you require assistance of this nature.

Saving tax for the year ending 5 April 2021

Individual Savings Accounts (“ISAs”)

Utilise your 2020/21 allowance - individuals can invest a maximum of £20,000, the same as for 2019/20. Income and gains within ISAs are free of UK income tax and CGT. Additionally the limit for Junior ISAs is £9,000 for 2020/21. These limits remain for 2021/22.

Pension contributions

Pension contributions made by individuals continue to attract tax relief subject to the following limits:-

  1. £3,600 for individuals with no earnings or earnings up to £3,600 per annum;
  2. The individual’s relevant earnings up to a maximum of £40,000 per annum.

The overall lifetime allowance for an individual’s pension fund has increased to £1,073,100, and this will now be frozen until April 2026.

Annual tax relief on contributions is available at an individual’s marginal rate of tax, and there is the availability to carry forward unused allowances for three earlier years (subject to limits and conditions). There are significant implications for high earners due to the legislation currently in place, however, the income thresholds for tapering were increased by £90,000 in the 2020 Budget meaning this will affect fewer people for the 2020/21 tax year. In the event that you have not already done so, we recommend that you review your 2020/21 position at the earliest opportunity, and certainly before 5 April 2021.

Pension planning can be particularly effective where total income is expected to exceed £100,000, leading to a loss of all or part of the 2020/21 personal allowance. Effective planning can reduce income and preserve the personal allowance, and where you are aged 55 or over, it may be worth considering taking a tax free lump sum from your pension scheme at an early stage.

With the reduction in tax deductible pension contributions for high earners, it is important to consider the options available to you prior to 6 April 2021. Advice should be sought from your Independent Financial Adviser (IFA) as a matter of urgency. If you do not have an IFA we would be happy to recommend one to you.

Charitable giving

Higher rate tax relief can be obtained on Gift Aid donations and charitable Deeds of Covenant. Where total income is expected to exceed £100,000, charitable giving can be used to preserve the personal allowance.

Sharing income

The transfer of income producing assets from one family member to another can result in family income being spread between those members, so that as few as possible face a reduction or withdrawal of their personal allowance. In addition to preserving personal allowances, income producing assets can be transferred in order to maximise the tax rate bands.

For example, if one spouse faces a 40% or 45% marginal tax rate and the other is a basic rate taxpayer, there is potential for a 20% or 25% tax saving to be made once the asset has been transferred.

Care needs to be taken in passing business assets between family members, and Capital Gains Tax and Inheritance Tax also need to be considered. It may be appropriate to combine this exercise with additional Inheritance Tax planning.

Salaries and bonuses

Consideration should be given to utilising unused personal allowances by means of taking a salary, bonus or dividend from your limited company. Salaries and bonuses will need to be paid before 5 April 2021 in order to be effective for the purposes of claiming Corporation Tax relief.

Please also note that for payroll purposes, the Real Time Information (RTI) regulations have removed the flexibility that could sometimes be employed when dealing with salary issues. It is therefore now essential that any wages/bonuses that have been accrued for or are due to be paid, are processed through the payroll and recognised by 5 April 2021 at the latest.

Enterprise Investment Scheme (“EIS”)

Income tax relief at 30% is available where an investor subscribes for shares in a company, and both the investor and the company meet the qualifying conditions. The maximum investment qualifying for relief is £1 million, with an additional £1 million annual limit as long as at least £1 million is invested in “knowledge intensive” companies. Capital gains on the realisation of the EIS investment are tax free provided that the shares are held for a minimum of three years.

It is also possible to defer capital gains tax by making an investment in EIS shares. The investment must be made within a period of one year immediately preceding or three years immediately following the date on which the capital gain is realised.

EIS shares held for more than two years usually qualify for Business Property Relief (BPR), for Inheritance Tax purposes. Advice is critical, however, as there are numerous conditions that need to be satisfied in order to secure the relief.

Seed Enterprise Investment Scheme (“SEIS”)

This is a tax advantaged venture capital scheme, similar to EIS in many of its scheme rules. It focuses on smaller early stage companies carrying on or preparing for a new business in a qualifying trade.

Income tax relief at 50% is available to an investor on the amount he subscribes for shares, subject to an overall investment limit of £100,000. Capital gains tax reliefs operate on broadly the same principles as those for EIS. Shares must be held for a minimum of three years to avoid the withdrawal of reliefs obtained.

Venture Capital Trusts (“VCTs”)

A VCT is a close ended quoted investment vehicle which looks to invest in small unquoted trading companies. 30% income tax relief can be claimed up to a maximum investment of £200,000 when you subscribe for shares in a VCT.

Dividends and capital gains from the VCT are tax free provided that the VCT is held for five years.

Capital gains tax

Consider the disposal of assets in order to make use of the annual capital gains tax exemption of £12,300. This cannot be carried forward and will be wasted where it is not used by 5 April 2021. Conversely, if you have already used your annual exemption then delaying a potential transaction until after 5 April 2021 will mean that the tax is effectively paid one year later – by 31 January 2023 (excluding tax due on residential property under the 30 day rule).

If you have already realised gains and have some investments standing at a loss, consider selling the ones at a loss to reduce your tax bill. Spouses should also consider transferring ownership of assets in order to make use of the annual exemption, although intra-spouse transfers carry no capital gains tax implications

Gifts

Lifetime gifts to any one person during 2020/21 are exempt from Inheritance Tax where the total gifts to that person do not exceed £250.

The first £3,000 of lifetime transfers made during 2020/21 are exempt from Inheritance Tax, together with a further £3,000 where the exempt amount from 2019/20 remains unused.

Further gifts may also be made in consideration of marriage or civil partnership - £5,000 by a parent, £2,500 by a grandparent, £2,500 by one party to the marriage/civil partnership to the other and £1,000 in any other case.

In addition, unlimited regular gifts by an individual out of income can be made free of inheritance tax, provided that the income is surplus to meeting normal living expenses. In this scenario, gifts are tax free (even in the event of death within seven years). It is important to record gifts of this nature as they are made, in the event that you are called upon to demonstrate that they qualify for this relief.

Business Tax

The planned reduction of the Annual Investment Allowance (AIA) 100% tax relief on qualifying capital expenditure from £1m to £200k with effect from 1 January 2021 has been delayed for another year as a result of Covid-19 and now only comes into effect on 1 January 2022, providing additional opportunity for business owners to invest tax-efficiently.

The flat rate per annum capital allowance on the construction of new non-residential buildings increased from 2% to 3% from 1 April 2020 for corporation tax and from 6 April 2020 for income tax. The costs that can be claimed include that for the alteration of the land – including demolition, but not the cost of the land or obtaining planning permission.

Planning ahead – Incorporation

Consideration can be given to restructuring your business as a corporate vehicle, in order that personal tax liabilities can be limited to the extent that income is withdrawn by way of salary or dividend. Whilst business profits will be subject to Corporation Tax, planning of this nature gives scope for personal allowances to be maximised and higher rate tax exposure to be mitigated.

There are other tax consequences and commercial reasons that need to be considered before the decision to operate as a limited company can be taken, but with potentially significant tax savings on offer, this is an area of planning that can prove to be extremely beneficial.

Changes for the year ending 5 April 2022 and onwards

Both the Chancellor’s March 2020 and March 2021 Budgets were focused almost entirely on measures to be brought in as a result of the Coronavirus pandemic. As a result, widely anticipated changes to capital taxes in particular have not been mentioned, although the Government has announced a capital taxes consultation starting on 23 March 2021.

Personal Allowance

The tax free personal allowance was frozen last year remaining at £12,500 for 2020/21. Following the Chancellor’s Budget announcement, it will increase to £12,570 as planned from 6 April 2021, but will then be frozen until April 2026.

Personal Savings Allowance

A starting rate for a savings band of £5,000 at 0% may be available unless taxable non-savings income exceeds the starting rate band, as follows:

  • If your total taxable income is less that £18,570 in a given year, you will not pay tax on your savings income.
  • If your total taxable income is between £18,571 and £50,270, the first £1,000 savings income is tax-free.
  • If your total taxable income is between £50,271 and £150,000, the first £500 of savings income is tax-free.
  • The allowance is not available for those with total taxable income exceeding £150,000

Marriage Allowance

The Marriage Allowance allows for up to 10% of your personal allowance (£1,257 in 2021/22, increased from £1,250 in 2020/21) to be transferred to a spouse or civil partner if your income is less than £12,570 (£12,500 in 2020/21). The recipient’s tax liability is reduced by 20% of the amount transferred, giving a potential saving of £251.40 for 2021/22 (£250 for 2020/21).

This is available to couples, provided that the higher earner is not a higher or additional rate taxpayer. However, married couples who are eligible to claim the Married Couples Allowance (MCA) will not be able to make a claim. Claims are also allowed where a partner has died before the claim was made and claims will be able to be backdated by up to four years.

Higher Rate threshold

The amount of income you can earn before paying the 40% higher rate of tax increases to £50,270 in 2021/22 from £50,000 in 2020/21 and will then be frozen until April 2026.

Tax on dividends

The first £2,000 of dividends are free of tax due to the Dividend Allowance (£2,000 in 2020/21).

The rates thereafter are:

  • 5% for basic rate taxpayers
  • 5% for higher rate taxpayers
  • 1% for additional rate taxpayers

Limited companies are still a very tax efficient route of managing your business, given that you are only liable to 7.5% tax on your dividends if you are a basic rate taxpayer (should you choose to remunerate yourself this way) rather than you being liable to 20% tax and 9% Class 4 National Insurance on profits through self-employment.

Mortgage Interest on Residential Lets

2019/20 was the final year of the phased in restriction of tax relief for mortgage interest, and for 2020/21 onwards no mortgage interest can be claimed against rental income and instead, a limit of 20% tax relief on the full amount of loan interest is available.

For some basic rate tax payers with rental income, this will not have much (if any) impact on the amount of tax that they pay on their rental profits. However, this is not the case for everyone and we can always review the impact of this for any client who would like more details of how the restriction now affects them.

Capital gains tax

There have been no movements in the Capital Gains Tax rates, although the Government has announced a capital taxes consultation starting on 23 March 2021. The capital gains tax annual exempt amount of £12,300 will be frozen until April 2026.

The sale of assets excluding residential property is charged at 10% for basic rate tax payers and 20% for higher rate tax payers.

Capital Gains Tax on the sale of residential property is charged at 18% for basic rate tax payers and 28% for higher rate tax payers. 

The tax rate applying when Entrepreneurs’ relief (ER) is available is 10% with a maximum lifetime allowance of £1M.

Similarly, the tax rate applying when Investors’ relief is available is 10%

Stamp Duty Land Tax

The Stamp Duty Land Tax (SDLT) holiday that was brought in last summer as a result of Covid-19 has been extended following the Chancellor’s Budget statement. The threshold above which SDLT is payable remains at £500,000 to 30 June 2021, it then falls to £250,000 until 30 September 2021 and goes back to the previous level of £125,000 on 1 October 2021.


From 1 April 2021, a 2% SDLT surcharge will apply on residential property acquired by non UK residents.

IHT nil rate band and residence nil rate band

The IHT nil rate band remained at £325,000 for 2020/21 and will be frozen at this level until April 2026.

The ‘residence nil rate band’ (RNRB) which was phased in over several years, has now reached its maximum level of £175,000 for deaths in 2020/21 and will be frozen at this level until April 2026.

The allowance is available per person, and so a couple may benefit from double the allowance. There are a number of conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing Will. Please approach a member of our tax team should you wish to discuss how this may affect your Inheritance Tax planning.

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