Whilst thinking about tax may not always be a popular pastime, as the 2021/22 tax year draws to a close, it’s certainly worth putting aside a little time to consider simple tax planning measures that need action before 5 April.
All individuals can benefit from the annual income tax personal allowance. For 2021/22, income of up to £12,570 can be received free of income tax. It may be possible to maximise the use of personal allowances, if not this year, in future years by ensuring effective distribution of income bearing assets such as quoted company shares or income bearing bank accounts between spouses and civil partners. Shareholders in family companies should think about topping up income of those individual shareholders with less than the allowance, by paying dividends where possible. If there is a family trust, think about topping up income by making payments out of trust income where appropriate.
The personal allowance is tapered for those with income above £100,000, which can result in an effective marginal tax rate of 60 per cent on income between £100,000 and £125,140. In this situation, deferring receipt of income until after 5 April where possible may help, though if this is a recurring issue this simply defers the problem. Those finding themselves in this position should consider maximising their pension contributions. Although the maximum annual pension allowance in a tax year is £40,000, unused relief can be carried forward for up to three years. Pension contributions are effective in reducing the tax burden for all taxpayers but particularly so for those falling into the 60 per cent marginal tax rate. However, care needs to be taken not to exceed the lifetime allowance as this will incur a tax charge.
Individuals can also benefit from an annual capital gains tax exemption (£12,300 for 2021/22) so if you haven’t already made gains up to that limit, consider whether it may be appropriate to realise further gains tax-free. Assets can be transferred to a spouse or civil partner tax-free giving further flexibility for using additional exemptions or ensuring capital losses can be used effectively.
Income and capital gains generated within an individual savings account (ISA) are tax-free and for the 2021/22 tax year you can invest up to £20,000 in cash or stocks and shares. Do you want to top up your ISA before 6 April to make use of the current year allowance but worry about the immediate volatility of the stock market? Ask your ISA provider if the contributions can be held in cash until things settle down.