With the tax year end fast approaching, individuals need to think about actions required make best use of reliefs currently available to mitigate their tax liabilities.
Pensions tax relief
Tax relief is given at your marginal income tax rate on pension contributions made.
The maximum level of gross annual pension contributions you can make which attract tax relief for a tax year, known as the annual allowance (AA), depends on the level of your adjusted income.
If adjusted income is:
- less than £150,000, individuals have an AA of £40,000;
- between £150,000 and £210,000, the £40,000 AA is reduced by £1 for every £2 of income above £150,000;
- more than £210,000, the AA is £10,000.
However, in certain circumstances these rules can apply for those with income levels as low as £110,000, due to the way in which defined benefit pension rights are dealt with in the calculations.
These thresholds and allowances, or available tax reliefs, could be reduced in the Budget.
Unused pension relief from prior tax years
The amount of pension contributions that can be made that attract tax relief can be supplemented by utilising unused pensions tax AA carried forward from the three previous tax years.
5 April 2020 is significant as any unused AA from the 2016/17 tax year is permanently lost if it is not used by that date. This could, therefore, result in the loss of pension tax relief of up to £40,000.
The ability to carry forward unused AA could be changed or removed in the Budget. It may be appropriate to act now to reduce the risk of losing this valuable relief.
Act now to beat main residence relief changes
Main residence relief reduces the capital gains tax (CGT) payable on gains made on the disposal of residential property if the property has been your only or main residence at some point during the period of ownership.
Currently, if the property has been the main residence at some time during ownership, relief from CGT is given for the final 18 months of ownership.
From 6 April 2020, this final qualifying period is expected to be reduced to nine months, although it is extended to 36 months for taxpayers who are disabled or who are moving into a care home.
Following this reduction, it is likely that CGT liabilities will increase on disposals of residences that have not been the individual’s main residence throughout the period of ownership.
To benefit from the longer 18 month exempt period, owners will need to make a disposal before 6 April 2020.
Lettings relief changes from 6 April 2020
Landlords, who are individuals, of some residential property may see the loss of a further important relief if the property is sold after 5 April 2020.
Currently, lettings relief is available on disposal of a rental property which has previously been the individual’s main residence. The maximum lettings relief available is £40,000 per owner.
This relief is being substantially restricted from 6 April 2020. From that date, relief is no longer available for periods in which the rental property has been wholly let to and occupied by a tenant.
Landlords of residential property that was previously their main residence but has been let in the above circumstances, will need to make a disposal before 6 April 2020 to qualify for lettings relief.
Are you caught by an effective 60 per cent tax rate?
You lose £1 of your tax-free personal allowance for every £2 of taxable income over £100,000.
For the 2019/20 tax year, the personal allowance is £12,500, so if your taxable income is more than £125,000, you will lose your entire personal allowance.
The impact of the loss of the personal allowance is to increase the effective tax rate on the income between £100,000 and £125,000 from 40 per cent to 60 per cent.
The exposure to this effective 60 per cent tax rate can be reduced by making pension contributions and/or gifts to charity, as these have the impact of reducing your taxable income for this purpose. You will benefit from tax relief on the pension contributions, subject to the availability of AA and lifetime allowance, and on gifts made to charities too.