Tax-Tips: April 5th approaches!
There are several important and valuable tax-planning opportunities that will be lost after 5 April 2022. With only around 2 months to go until the end of the tax year, there is still time to take advantage of various tax-planning ideas that can make the most of your money and help provide financial security for you and your family. Here are a few key ideas:
(1) Boost your ISA savings
The ISA allowance of £20,000 in this tax year remains one of the simplest and most popular ways to shelter money from any further liability to Income Tax or Capital Gains Tax. It’s important not to overlook it. Cash ISA rates have reduced even further this year and the very best instant notice accounts are only paying 0.5-0.6%.1 Individuals yet to use their ISA allowance, or with accumulated ISA savings, need to carefully consider their options to ensure that they are maximising this valuable opportunity.
By maximising allowances in this and the next tax year, a couple could potentially shelter up to £80,000, building a significant tax-efficient fund for the future. Remember that there is no tax to pay on the transfer of assets between spouses and civil partners, making it easier to ensure both allowances are used.
(2) Top up your pension pot while the current allowances remain
Speculation continues over whether the government will cut back on allowances and reliefs provided to pension savers. Therefore, you should think about boosting your pension savings now by making the most of available allowances in this tax year, so that you can potentially benefit from higher rates of tax relief on your contributions.
For higher earners, due consideration also needs to be given to the annual and lifetime allowances.
(3) Reduce your taxable estate
Only effective and early planning can minimise the impact of Inheritance Tax (IHT) on your estate. Lifetime gifting is one of the most underused and useful ways to help reduce your IHT bill. You can make gifts worth up to £3,000 in each tax year (£6,000 if you use the previous year’s allowance as well) – money that will be immediately outside your estate. So, a couple could potentially remove £12,000 from their joint estate before 5 April. Remember that last year’s allowance will be lost after that date.
And of course, you can also make gifts out of income, so if you do have excess income that can be gifted too. (Don’t forget to keep proper records of any gifts made – this HMRC form evidences the information you need to record).
(4) Give younger generations a head start
You can make contributions of up to £9,000 per child into a Junior ISA this tax year; an allowance that will be lost after 5 April. Making an early start with Junior ISA savings means that money will be locked away for a decade or more. Investing it wisely with a long-term view should help build up a more significant sum to help children with the future financial challenges they’ll face. For longer term planners, you can also make contributions to children or grandchildren’s pensions.
(5) Don’t waste your annual Capital Gains Tax (CGT) exemption
There is continuing speculation that capital gain tax increases will be one of the first fiscal levers that the chancellor will pull to increase the tax take in the aftermath of the pandemic. The annual tax-free allowance of £12,300 remains one of the most valuable, yet underused, opportunities to minimise the impact of the tax on your wealth. Gains above this figure are taxed at up to 20% (for 2021/22) on assets such as shares, and up to 28% from the sale of residential investment properties. By crystallising gains each year up to the limit of your allowance, you can reduce the risk of a larger CGT bill in the future. Better still, reinvesting the proceeds into tax-exempt wrappers such as ISAs and pensions can help avoid any future CGT liability altogether. It may also make sense to realise gains above the annual £12,300 allowance if rates are likely to increase in the future.
Don’t forget that assets can be transferred tax-free between spouses to utilise both allowances.
(6) Review your taxable income
High earners could take steps to bring their taxable income down by making pension contributions or charitable donations. These can help individuals to:
• Bring their income to below the additional rate tax band, which starts at £150,000.
• Regain their Personal Allowance, which starts to be withdrawn for incomes over £100,000 (effectively taxing income at 60% between £100,000 and £125,140). I wrote about this here.
• Avoid losing Child Benefit, which is gradually removed if one person in the household earns more than £50,000.
(7) Take income from savings tax-efficiently
If you’re thinking of making a large pension withdrawal, it could make sense to spread the withdrawal over two or more tax years to minimise your Income Tax liability. Alternatively, if you expect the amount you draw from your pension pot to tip you into a higher tax bracket, you could use ISA savings instead. ISAs don’t attract Income Tax no matter how much you take.
Give me a call on 0207 097 4968 if you would like to discuss your year-end financial planning priorities.
1Moneyfacts, January 2022
The value of an investment will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning