05 Mar End of the tax year
The end of the tax year is fast approaching and with it is the last chance to ensure that you have maximised any tax exemptions and allowance opportunities that are available each year. Several of these are ‘use it or lose it’, so if you don’t take advantage before the end of the tax year, there is no chance to go back.
So, here is a list of some of the opportunities that are tax year-dependent:
Individual savings account (ISA) subscriptions
Every adult over the age of 18 who is a UK tax resident has the ability to put £20,000 into an ISA. These offer a relatively easy way to save using either a cash ISA or an investment ISA. An ISA is not subject to income tax on dividends or interest and any capital gains realised are not subject to capital gains tax (CGT). Investment ISAs, therefore, offer better tax benefits when used to invest in assets which would otherwise be subject to CGT.
There are various other types of ISA, such as junior ISAs (JISAs) and lifetime ISAs (LISAs). All have a maximum subscription limit per tax year that if not used is not available to be carried forward to a future year; nor can you go back and use any unused allowance from previous tax years.
If you are worried about investing a lump sum at the end of the tax year and are therefore reluctant to invest in an ISA, consider using a provider which allows the funds to be temporarily held in cash and then moved into your chosen investments later. Or you could use a cash ISA and transfer this to an investment ISA at a later date. However, there is considerable evidence to suggest that precisely when you make an investment that you then hold for many years actually makes very little difference to the long term return.
Contributions to pension schemes are also tax year-related and can be very tax-efficient. Contributions attract tax relief at the member’s highest marginal rate of income tax, if the contributions are made personally, or are not subject to tax if made by an employer.
The is no limit to the amount that can be paid into, or deemed to be accrued in, a pension but in reality there is if you want to ensure that you obtain income tax relief and avoid a tax charge. The upper limit for tax relief is £40,000 per tax year and is known as the annual allowance (AA). There are two ways that the AA can be reduced, the tapered AA and money purchase AA. Information on both of these restrictions can be found in our Guide to Pensions at https://www.bloomsburywealth.co.uk/guide-to-pension/.
How much income tax relief you obtain is determined by your ‘pensionable earnings’ in the tax year. So, if you are likely to see a reduction in taxable earnings – maybe you are moving to consultancy or reducing your hours – it may be better to make a contribution in the current tax year.
You do have the ability to go back and use up unused AA for three previous tax years, subject to certain conditions, but you should still check your current income tax position to see if any extra contributions will attract the highest possible tax relief. There are always rumours around budget time about a cut in pension tax relief so if you are concerned then you need to make the contribution before the day (11th March this year), in case any such changes actually materialise.
Don’t forget that each UK tax resident gets an annual exemption from CGT each tax year. This is currently £12,000 and if not used is lost. This exemption is probably one of the most underused due to the fact that most people don’t have investments large enough to be able to realise gains of up to this amount on a regular basis. However, if you do have a portfolio of investment funds or shares that are not in an ISA, pension or other exempt wrapper, then it is worth trying to realise gains of up to the exemption to reduce future CGT. These gains could be used to supplement income, top up your cash reserve or just as part of rebalancing your portfolio back to your desired composition and rebasing the acquisition costs at a higher level.
Also don’t forget that if you are married, you both have an exemption and you can gift assets to each other free of CGT. You might have the opportunity to use two exemptions by passing assets with larger unrealised gains to each other or splitting a holding between you both but allow adequate time for the transfer to be processed so that the disposal can be made before 5th April. For large gains it might be sensible not only to share ownership of an asset but also to spread the sale of the holding across two tax years (i.e. one before 5th April and one after) to use two exemptions each.
Annual gift allowance
Everyone has an annual gift exemption of £3,000 which is immediately exempt from inheritance tax (IHT), plus £3,000 if not used from the previous tax year. Any unused exemption can be carried forward for one year but it must be used after the £3,000 exemption for that year. So, if these haven’t been used before, a couple can gift £12,000 in the first tax year and then £6,000 each tax year thereafter.
Total taxable earnings
There can be several different reasons why you might wish to adjust, or try to reduce, your total taxable earnings for a tax year. It could be to keep your total earnings under £100,000 to avoid the loss of your personal allowance (which incurs an effective marginal tax rate of 60%), to reduce the impact of the child benefit tax charge by keeping your earnings below £60,000 or to minimise the impact of the tapered AA for total adjusted income over £150,000 (see our Guide to Pensions: https://www.bloomsburywealth.co.uk/guide-to-pension/).
Whatever the reason, there are several ways you might be able to reduce your total taxable income and some but not all are tax year-end sensitive. If you are in control of your earnings, either by owning or trading through a limited company, you might want to defer drawing additional salary, bonus or dividends until the new tax year. If you are employed or own your own company, you might want the company to make pension contributions on your behalf rather than draw additional remuneration.
Checking with your tax adviser or accountant about what is sensible planning around your total taxable earnings is a good idea before the end of the tax year or your company year-end if applicable.
It might also be beneficial to make a pension contribution personally to reduce your total taxable earnings or to defer a bonus payment to the new tax year.
Making a charitable donation might also reduce your taxable earnings and could be worthwhile considering if you have a cause about which you are passionate. These can be backdated to the previous tax year if made before the following 31st January and included in your tax return.
The above list is not exhaustive and simply gives some examples. There are many reasons all year round to look at your financial position and check you’re not missing out on any planning opportunities; the end of the tax year just highlights the need to ensure that some are done before you lose the chance for this year.