With three months left until the end of the financial year, now is a good time for a quick financial review. The purpose of a review is to make sure that you are getting the most out of your tax allowances and to reduce your tax bill as much as possible. It need not take too long and could potentially make a big difference to your finances. You can do it yourself, using the details below (applicable to England), or ask one of our independent financial advisers at www.plutuswealth.com to help. We can review your current and any other available allocations, so that you get the most out of them and more money in your pocket come April.
The 2021–2022 financial year ends on 5 April 2022, and the next one begins on 6 April 2022. This gives you three months to make any changes to your finances to lock in this year’s tax allowances.
Types of tax and allowances that may apply to you
Income Tax is the main one, and the one that most are familiar with. There are a number of other elements that are subject to tax or that can help reduce your tax bill, including:
· savings and investments
· Capital Gains Tax
· Inheritance Tax
We take each in turn and consider what the thresholds are(where applicable) and what you can do to get the maximum benefits. Full details on all types of tax are available on the government's money and tax pages.
The level of Income Tax applied depends on your gross annual income. There are a few things to keep in mind:
· The Personal Allowance is £12,570 on income up to £100,000. If you earn more than £100,000, your Personal Allowance drops by £1 for every £2 you earn above £100,000. In practice, this means that if you earn more than £125,140, the Personal Allowance will not be available to you.
· Income tax bands will also be important. They are set at:
o Basic rate of 20% for incomes between £12,571 and £50,270
o Higher rate of 40% for incomes between £50,271 and £150,000
o Additional rate of 45% for incomes above £150,001
· Bonuses are an important consideration. If you are close to any of these thresholds and are expecting a bonus, ask whether it can be deferred until after 6 April 2022. By doing this, you postpone that income to next year, which could mean the difference between one income tax band and another for this year. It could even be the difference between benefiting from the Personal Allowance or having to forgo it if you earn more than £125,140.
Savings and investments
Money you earn through any savings and investments you hold is also subject to tax. The amount you pay will depend on which Income Tax band you fall under.
· If you are a basic rate taxpayer, you will be taxed for any income from savings and investments that is above £1,000. Once you earn more than this, it will be subject to a 20% tax rate.
· For higher rate taxpayers, the threshold drops to £500. Anything above this will be taxed at 40%.
Right now interest rates are low, reducing the amount you earn from savings. Yet you could still be caught out because it depends on how much you have saved or invested. It is possible to reduce the amount earned by putting your money into an Individual Savings Account (ISA). ISAs allow you to invest up to £20,000 in any financial year with any earnings being tax free. There are four types:
· Cash ISA. Most banks and building societies offer these, and you can invest in them at any time during the financial year. You do not need to declare a cash ISA on your tax return and will not pay any tax on income earned.
· Stocks and shares ISA. These can include shares in a company, corporate and government bonds, and unit trusts and investment funds.
· Innovative finance ISA. This is for any loans you wish to make to others without going through a bank. Alternatively ,you could invest in a business by buying its debt as part of a crowdfunding debenture.
· Lifetime ISA. These can be either in the form of cash or stocks and shares. However, you can only pay up to £4,000 into this ISA type in each financial year.
You can choose one or a mix of the ISA types, as long as the maximum is no more than £20,000 in any one financial year.
Dividends earned through investment in company shares are included within your Personal Allowance. In addition, a dividend allowance of £2,000 also applies. This means that you will not pay tax unless you have earned more than £2,000 and that you have earned more than your Personal Allowance. Once you have gone above those two thresholds, your Income Tax band will apply. This means you will be taxed at the following rates for dividend earnings:
· Basic rate taxpayers will pay 7.5% tax
· Higher rate taxpayers will pay 32.5%
· Additional rate taxpayers will pay 38.1%
As with bonuses, if there is a way to defer any dividend income if you are close to the allowance thresholds, it could make a difference.
Capital Gains Tax
Capital Gains Tax applies when you sell an asset, such as a second home. The tax is levied on the profit – the difference between what you paid for it when you bought it and what you sold it for.
There is an allowance of £12,300 for any capital gains (this drops to £6,150 for trusts). This is called the Annual Exempt Amount. A few things to know about Capital Gains Tax:
· Different Capital Gains Tax rates apply for residential properties and any other assets.
· The rate applied to basic rate taxpayers starts at 10% and will depend on:
o how much you gained
o what your other taxable income is
o whether your capital gains are from the sale of a residential property or other assets
· The rate applied to higher and additional rate taxpayers is:
o 28%on residential property gains
o 20%on gains from other assets
Capital gains made by companies or trustees are subject to different rules. For more detailed information, it is worth talking to an independent financial adviser.
The tax benefits related to pensions come from investing in them during your working life, and they can be substantial. Paying into a pension will automatically attract tax relief, with the government paying that directly into your pension fund. There is an annual limit of £40,000, but adding any amount to your pension will allow you to claim tax relief on it. In other words, instead of paying tax on the money you pay into your pension, the government gives it back to you by adding to your pension pot.
There are a couple of things worth keeping in mind:
· Going above the £40,000 annual contribution will be subject to tax. However, you could carry forward any unused tax allowance from the previous 3 years. There are a few considerations and complications to this. Our independent financial advisers can help with to ensure you get the maximum benefits.
· There is a lifetime pension allowance of£1,073,100. This applies to all payments made into a pension over your lifetime. If you are close to this threshold, speak to one of our advisers for tailored advice.
Perhaps one of the most complex areas of tax but one that you could also plan ahead for and reduce somewhat. The current rate of Inheritance Tax is 40%. This means that your beneficiaries would be liable to pay 40% on any assets they inherit. To help reduce this and find the best way of doing so for you, talk to one of our independent financial advisers. They will assess your options and make suggestions tailored to your circumstances and needs.
Making the most of your tax allowances for you
While we think that everyone wants to save on tax, many would prefer not to have to delve into tax themselves. If this is you, then please talk to us. Our Plutus Wealth team’s independent financial advisers and tax specialists can assist with any financial assessment and help you make the most of your tax allowances. Set up an appointment by calling us on 020 7871 5200 or emailing us at firstname.lastname@example.org.
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