Every year the government provides allowances and reliefs available for all taxpayers. Are you making the most of these? Or is another year going to pass and you won’t have checked to see how you and your family might benefit? Read on to remind yourself of the opportunities you might miss if you don’t act now.
Personal income tax allowance
The personal allowance for tax year 2021/22 is £12,570, meaning you can earn up to this amount without paying any tax. This can be used against your State Pensions, any income which you are drawing down from your private pension arrangements as well as your other investments or cash savings which are liable to income tax.
If you earn over £100,000, the figure of £12,570 will be reduced by £1 for every £2 earnt. If you earn £125,000 or more, income tax is paid on everything earnt so no tax-free allowance.
Opportunity
If you are affected by this, it is worth considering making pension contributions or charitable donations to reduce you tax liability. Your financial adviser will be able to help you with this.
Starting rate for savings
The starting rate for savings means you can earn up to £5,000 (2021/22) from savings before you pay any tax. It is designed to help those on lower incomes so the £5,000 is reduced by £1 for every £1 of income you earn over the annual allowance. However together with the personal allowance of £12,570 it means you could earn up to £17,570 a year tax free in savings.
Opportunity
Your adviser can discuss with you how our solutions can give you flexibility around income. For example, if you are drawing down income from your pension it may be possible to suppress this income in a tax year if you needed to encash an investment bond where the gains are categorised as savings and could make use of this allowance.
Saving allowance
Since April 2016, savers have been able to grow their money tax free, thanks to the ‘personal savings allowance.’ This allowance allows you to earn up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher- rate (40%) taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £150,000 each year, you’ll pay tax on all your savings.
Opportunity
Using the savings allowance against any cash savings you have, including your emergency fund, could generate tax free income for you. If you are a higher or additional rate taxpayer, consider tax planning opportunities which could bring you into a lower bracket and save you money. You can find out more about this by speaking to your financial adviser.
Dividend allowance
You do not pay tax on any dividend income that falls within your personal allowance (the amount of income you can earn each year without paying tax). You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. For tax year 2021/22 the dividend allowance is £2,000. This means if you have used up your personal allowance with other sources of income you can earn an additional £2,000 in dividends without paying any tax.
Opportunity
Investing directly into equities or a fund which generates equity income will mean you can utilise your dividend allowance. You could also consider transferring shares to a spouse or civil partner if they have not used their own dividend allowance, to benefit from further tax relief.
CGT allowance
The capital gains tax allowance in 2021/22 is £12,300, This is the amount of profit you can make from an asset sale this tax year before any tax is payable. Investments held in a General Investment Account (GIA) will be subject to CGT only when you decide to sell them or transfer them to anyone other than your spouse or civil partner. There is currently no CGT payable on death.
Opportunity
If you need to release capital for a specific purpose you could consider making use of your annual CGT allowance to do this without paying any tax. If you do need to release any capital from your savings your financial adviser will be able to determine the most tax efficient way for you to do this. You could also consider gifting assets to a spouse or civil partner (which is tax neutral) so they can also use their CGT exemption.
Many clients also use their annual CGT allowance to take up their annual ISA allowance (£20,000). All income and capital gains from investments held in ISAs are tax free and do not need to be declared on your tax return. Claiming previous losses is also an option. If have sold any assets and realised a loss, make sure you claim the loss on your tax return, as this can be offset against any gains above your allowance. If you do not claim the loss within four years the option will be lost.
ISA allowances
Make full use of the ISA allowance. For 2021/22 the maximum investment is £20,000, and for children under the age of 18 the JISA allowance is £9,000. The annual ISA limit can be split between cash and permitted investments, such as stocks and shares.
Pension allowances
The annual allowance is the most that can be paid into all your pension arrangements in a single tax year. For 2021/22 it is 100% of earned income up to a limit of £40,000. This may be lower if you have already accessed your pension pots, or you have a high income.
Opportunity
Contributing into a family pension scheme is another option. Any UK resident can contribute up to £2,880 (net) into a pension, irrespective of their earnings, and obtain 20 per cent tax relief. This means the pension is credited with an extra £720 so that the gross contribution amounts to £3,600. You could consider contributing to a pension for a non- working spouse/civil partner or children to benefit from this. Your financial adviser will be able to help you identify these opportunities to save tax.
Inheritance tax (IHT)
IHT is arguably one of the more complex areas of tax. The current Nil Rate Band is £325,000 and there is an additional Residential Nil Rate Band of £175,000. This means a married couple is only likely to pay IHT if the estate is above £1m. If your estate is above this amount your financial adviser can discuss ways to mitigate any IHT payable on death, such as the use of trusts or life cover.
Opportunity
You can also make use of various IHT allowances each tax year. Gifts of up to £3,000 in total can be made each year without any IHT implications. If the £3,000 exemption was unused in the previous tax year, this can be carried forward so the maximum available exemption can be up to £6,000. A married couple could gift up to £12,000 in a single tax year with no IHT implications. This is worth bearing in mind if you are thinking of investing for children or grandchildren into a JISA (Junior ISA) or a pension. As well as the tax benefits of doing this you should also discuss family linking with your adviser as it is possible to make further savings. Other exemptions are available. For example, small gifts of up to £250 per recipient and gifts in consideration of marriage of up to £5,000 by a parent. Regular gifts out of a surplus income are not subject to IHT, so being able to show a pattern of gifts can remove this from your estate immediately. To be accepted, you must be able to show you have maintained your standard of living after the gifts.
Complex Tax Planning Products
enture Capital Trusts ( CTs) and Enterprise Investment Schemes (EIS) are designed to encourage investments in smaller early stage companies. They are considered high risk but offer generous tax benefits. CTs give 30% tax income tax rebate on investments up to £200,000, tax free dividends and no CGT on any realised gains.
An EIS gives 30% tax relief on investments up to £2 million and CGT gains from other investments can be deferred. These are specialist complex products which will not be suitable for all clients.
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
CT’s and EIS’s invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies.
The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.
Tax treatment varies according to individual circumstances and is subject to change.
It is important to take professional advice before making any decision relating to your personal finances. Information within this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.
Tax and Estate planning are not regulated by the Financial Conduct Authority
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
Will writing is not regulated by the Financial Conduct Authority.
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