Just a couple of weeks to go before we say goodbye to the 20/21 tax year. Many allowances will roll over on 6 April 2021 and if you have not used them in this tax year, the opportunity will be lost. Noted below are some of the key areas for you to review to ensure you have been tax efficient in the year. Taking action now will allow you to take advantage of any exemptions, remaining reliefs and allowances before they are lost for the year.
Ensure if possible you have sufficient income to use your personal allowance. The allowance is £12,500 for 2020/21. If a family member has unused allowance consider if there are ways for this to be utilised.
If you have a limited company, ensure the £2,000 tax free dividend allowance has been utilised – assuming you have sufficient distributable profits to be able to declare a dividend. Also remember that dividends are paid “per share” so have to be paid to everyone holding that class of share in accordance with their shareholding.
For married couples/civil partners that are eligible for the Married Couples Allowance, ensure this has been claimed. If one partner has not used all their personal allowance, and the other is a basic rate taxpayer, then up to £1,250 of the personal allowance can be transferred, saving £250 as a couple. This can also be backdated to tax years since 5 April 2016 if not claimed previously. The claim is simple and can be done here .
Consider ways to reduce your taxable income if you are within the £100,000 to £125,000 group to prevent a 60% effective charge. Pension contributions and charitable donations are two ways you can reduce your taxable income.
If your income will be over £50,000 also consider ways to reduce this if you have children and are claiming child benefit. This is clawed back if the higher earning partner’s income is over £50,000, on a sliding scale, and all has to be paid back if your income is over £60,000 in a tax year.
Annual ISA subscriptions should be maximised. The limit for 2020/21 remains at £20,000. The investment return from ISAs is free from income tax and capital gains tax. Talk to an IFA to get advice on utilising your ISA allowance.
Most individuals can make contributions of up to 100% of their earnings, capped at £40,000 each tax year. Pension contributions are tax effective as tax relief is given at source for a personal contribution, but the contribution needs to be made before the end of the tax year for it to qualify. Very high earners may be limited on the amount they can contribute and need to take individual advice.
If you do not use all your allowance in one year, you can carry it forward for up to three years. Any unused allowance for 2017/18 will be lost after 5 April 2021.
Even if you have no income, you can still make a net pension contribution of up to £2,880 and the government will add £720 basic rate tax relief, which can be a significant benefit.
Again take advice from an IFA as to your personal pension situation.
Everyone has a £3,000 annual exemption to use each year. This is the amount individuals can give away without any inheritance tax implications. Any unused exemption can be carried forward for one tax year only. This may be of use to the older generation wanting to help their families in these difficult times.
Small gifts of up to £250 made to an individual are also exempt each tax year.
If you would like any advice about your personal tax position then please do get in touch with Rosie Forsyth@wilkinsco.co.uk