The season of year end tax planning is nearly upon us as 5 April creeps closer.
The Autumn Budget has been rescheduled for spring for a second successive year. Once again, that means it is best to complete year-end tax planning before the Chancellor returns to the despatch box. Such a precaution is all the more important in 2020/21 as several areas of tax have come under scrutiny following earlier Treasury-commissioned reviews. With that warning in mind, your year end planning checklist should include the following.
Your income may have dropped this tax year because of reduced earnings during the pandemic, falling dividends or miniscule interest rates. So it might be worth trying to estimate your income for the full tax year to 5 April 2021, because it could point to tax-saving opportunities. For example, if your income is above £50,000 and you have or live with someone with children, you could be subject to the High Income Child Benefit Charge. Bringing your taxable income down – for example by making a pension contribution – could reduce or even eliminate that charge.
Check if you have any unused pension annual allowance from 2017/18, when the maximum annual allowance (before tapering) was £40,000. You have until the end of the current tax year to mop up this past allowance or lose it completely. However, it can only be used once you have exhausted your 2020/21 annual allowance, which may be higher than in previous years because of changes introduced in the March 2020 Budget.
You can go on to pick up more unused relief from the years after 2017/18, although you can also only do this once you have used up your current year’s allowance. Unsurprisingly, the calculations can quickly become complex, so do contact us as soon as possible if maximising today’s pension tax relief is important to you.
Capital gains tax
Capital gains tax (CGT) could soon be subject to some changes. In July the Chancellor asked the Office of Tax Simplification (OTS) to undertake a broad review of CGT. A first report from the OTS appeared in November. One proposal that could appeal to the Chancellor is a reversion to the regime which existed until 2008. Back then, CGT was levied at full income tax rates which would now mean rates of up to 45% rather than the current maximum of 20% (28% for non-exempt residential property and carried interest).
If you have capital gains in your portfolio, you should consider realising gains up to your available annual exempt amount before Budget day.
A separate OTS simplification review last year considered inheritance tax (IHT). It was not in the March 2020 Budget, but few experts think it has been left on a shelf to gather dust. Some reliefs could be under threat, such as those which apply to business assets and large regular gifts out of income. Ahead of the Budget you should think about using your £3,000 annual exemption; making individual gifts of up to £250; making regular gifts out of disposable income and whether to make any larger lifetime gifts.
The Financial Conduct Authority does not regulate tax advice, and levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change.