Year-end tax planning

The end of the tax year will be with us soon and there are a number of important tax reliefs that will be lost if not used by 5 April. We don’t have space to cover everything here, but important relevant reliefs include:

Personal allowance and capital gains tax exemption

The annual income tax personal allowance for 2021/22 is £12,570, so income of this amount can be received free of income tax. If you have family members with less income than this, consider possible ways to utilise the allowance – paying dividends above the dividend allowance or interest and trust income distributions are all worth thinking about.

£1 of the personal allowance is lost for each £2 of income received above £100,000. This creates an effective marginal tax rate of 60 per cent on income between £100,000 and £125,140. Deferring receipt of income until after 5 April where possible, and/or maximising pension contributions can, subject to the impact on later years, make a significant difference to the effective rate of tax suffered.

Similarly, the capital gains annual exemption allows up to £12,300 of gains to be realised without tax. If you have not already made gains of this amount, consider selling assets standing at a gain to take advantage, but remember that you can no longer ‘bed and breakfast’ chargeable assets. For example, if you repurchase shares in the same company within 30 days of selling them, the two transactions will be treated as cancelling each other out, so you either need to invest in other assets or wait 31 days to buy them back.

Relief for pension contributions 

The maximum annual pension allowance of £40,000 is available for contributions made in the tax year and any unused relief can be carried forward for up to three years. Subject to an individual’s pension fund not exceeding their lifetime allowance (currently £1,073,100), pension contributions can be tax efficient for all taxpayers and for anyone with a marginal effective tax rate of 60 per cent, pension tax relief can mean that a £10 contribution will cost only £4 of net income.

Reviewing brought forward pension tax relief for the past three years is also worthwhile, especially for those whose relief is restricted because they earn more than £240,000, above which the annual pension allowance is tapered by £1 for every £2 of income, to as little as £4,000.

Charitable giving

Charitable donations qualify for tax relief by extending the donor’s basic rate tax band. The mechanics can be confusing, but the net effect is that if a 40 per cent taxpayer donates £100, the charity receives £125 and the individual can personally claim back tax of £25. Be careful though: if you make a donation under Gift Aid and have not paid sufficient tax to match it, your tax liability will actually increase - a Gift Aid payment of £100 by a non-taxpayer will actually make them liable to pay tax of £25.

Inheritance tax

Taxpayers have a £3,000 annual gift exemption, which can be carried forward one year. This means that you can make gifts, including to friends or family, of up to £6,000 every other year without suffering inheritance tax if you do not survive the gift by seven years. If your income is greater than your living expenses, you may also be able to make larger inheritance tax-free gifts, but these must form a regular pattern of giving and you should take professional advice before proceeding with such a strategy.

EIS and SEIS allowances

Tax relief is given for certain qualifying investments in growing companies, where they have obtained approval from HMRC. Income tax relief at 30 per cent (EIS) and 50 per cent (SEIS) on the amount invested can be attractive, as well as exemption from capital gains tax on future realisation and the possibility to roll over (EIS) or partially exempt (SEIS) capital gains on other assets reinvested into such investments. These tax credits do not reduce the amount of income that is taxable but can substantially reduce the amount of tax that is ultimately payable.

For more information, please get in touch with Andrew Robins, or your usual RSM contact.