The Planning Series is back for the new year, and here to help you make the most of your tax allowances. With the end of the tax year fast approaching, now is the time to review where you are financially and what more you can do to maximise your tax allocation. With two months still to go, there is plenty of time and we can help you put things into place. Any one of our independent financial advisers can assist – just get in touch with us at www.plutuswealth.com.
Dates for your diary
The current financial year ends on 5 April 2021, and the 2021–2022 financial year kicks off on 6 April. This means that you have until 5 April if you are planning to make any changes to benefit from your tax allowances.
Where your tax goes
When it comes to personal tax allowances, there are as many ways to save on tax are there are ways to be taxed. We consider the main ones, although we do encourage you to get in touch with us for a more tailored analysis of your financial situation.
Income tax is the one we are all most familiar with. Whether you pay it through your employer or as a self-employed freelance, the personal allowance is the same. For this tax year, it is £12,500 and will apply if you earn up to £100,000. Once you have reached that threshold, the allowance drops by £1 for each £2 earnt. In practice, this means that if you earn more than £125,000, the personal allowance no longer applies. If this could be you, consider whether deferring income to the following tax year is possible. This way you can maximise the 2020–2021 personal allowance.
Still on income tax, the band rates will also be important. The HMRC website has a full breakdown of what they are and the income thresholds that apply. As a summary, the higher rate tax of 40% comes into play from £37,501 in England and Norther Ireland. The top rate of 45% will apply from £150,000 and above. Bonuses are a consideration and can often push income into the next tax bracket. Deferral may be easier for bonuses than for monthly income. If they can be paid after 6 April 2021, it could be the difference between one tax band and another for 2020–2021.
A final word on income tax. If you are drawing your pension, you will still have to pay income tax. The same rates apply, and you can benefit from the personal allowance as well.
Capital gains tax
This will apply if you have sold any assets in this financial year. While it includes residential homes, it does not apply to your primary residence, only to second or holiday homes. Capital gains tax will be paid on any gains made from the sale of an asset – that is the difference between what you initially paid for it and what you sold it for.
There is a tax-free allowance on this amount, which for 2020–2021 is £12,300. That taxable gain will be added to your other taxable income (e.g. from employment or a pension). If that total income falls below the £37,500 threshold, you will only have to pay 10% on your taxable gains. If you are taxed at a higher rate of income tax, then the applicable capital gains tax will be 28% for residential property and 20% for other assets. Different rates apply to trustees and companies, so it may be beneficial to speak to an independent financial adviser.
Savings and investments
Savings and investments and their earnings are also subject to tax. For lower-rate taxpayers, tax is levied on earnings of £1,000 and above. For higher income band taxpayers, tax is paid on earnings above £500. This will apply whether you have your money in a savings or an investment account. One easy way to reduce your tax burden is to invest in an ISA. For this financial year, any investment up to £20,000 will be exempt from tax.
There are four types to choose from. There are some limitations – such as being under 40 years of age to qualify for a Lifetime ISA, or under 18 for a Junior ISA – but you can open one at any time during the financial year. Junior ISAs are a great way to start investing for your children while making the most of your tax allowances.
Reducing your tax burden
As well as looking at your total income, deferring elements where possible, and considering how estate planning can help maximise your allowances, there are a number of other tools at your disposal. The main ones are covered here, but again, we encourage you to get in touch for a more detailed analysis of your personal circumstances.
Investing in your pension can help you make some significant tax savings. Any payments you make into your pension will attract tax relief. This comes in the form of money paid into your pension from the government. A £40,000 annual allowance applies to all pensions, allowing you to invest up to this amount and claim tax relief.
For high earners, a reduction on that annual allowance applies for earnings above £200,000. This means that for every £1 of income above £200,000, a £2 reduction in the annual allowance will apply. One of our independent financial advisers can work with you to calculate the best way of using this option to reduce your tax bill.
Making a charitable donation will also go towards reducing your tax bill. For basic tax rate earners, there is nothing further required of you. For higher and additional rate earners you can claim back the difference between the tax you’ve paid and what the charity received. You can do this through your self-assessment or by contacting HMRC.
Investing in other businesses or social enterprises is one further option at your disposal. However, the risk versus reward can be high. While the tax breaks can be significant, this should only be considered as a medium if not long-term investment. It is also best to have some investment experience before considering this as an option.
Finally, inheritance tax. While it strikes fear in many as it stands at 40%, there are numerous ways in which this can be reduced. Perhaps one of the more complex areas of tax, it pays to consider how inheritance planning can reduce your tax burden both now and in the future. For a more detailed, tailored solution, speak to one of our independent financial advisers. They will take a holistic and long-term view of your assets and help with estate planning to reduce how much overall tax you may have to pay this year.
We are here to help
This may seem daunting, and for some could be a complex consideration. With Plutus Wealth in your corner, it need not be. Get in touch with us now so we can assist with making the most of your tax allowances before the year is over. Call us on 020 7871 5200 or email us at firstname.lastname@example.org to make an appointment.