As we approach the 5 April 2022 deadline, it’s the perfect time to consider whether you’ve made the best use of your tax allowances available, as these can save you thousands of pounds each year.
While by no means the most exciting task, we have set out below some of the main reliefs and exemptions you should be considering.
You should, of course, obtain tax and financial advice based on your individual circumstances before taking any actions to ensure they fit into your wider financial plans.
Capital Gains Tax (CGT) annual exempt amount
You can realise capital gains of £12,300 before you pay any CGT. If you have assets standing at a gain, you should consider making disposals to utilise your allowance fully. This could save you up to £3,444.
If you have already used your CGT exemption, but your spouse or civil partner has not, you could consider transferring assets to them (which can generally be done tax-free). This would allow them to use their annual exempt amount, giving further tax benefits.
It may also be worth considering a gift to your spouse if you are a higher or additional rate taxpayer, as your partner may be able to benefit from a lower rate of CGT.
Personal Allowance and Marriage Allowance
Personal Allowance for 2021/22 is £12,570. If your income for the year is below this you should consider ways to increase this, making full use of the allowance. This could involve taking pension income or a dividend or bonus from a family company.
Your Personal Allowance is reduced if your income for the year exceeds £100,000. You lose £1 of Personal Allowance for every additional £2 of income which means an income tax rate of 60% can apply.
If your income for 2020/21 is likely to exceed £100,000, you should consider whether you can avoid the 60% marginal rate, for example, by making pension contributions, or charitable donations. If you expect your income to be lower in 2021/22, you may also want to consider deferring bonuses or salary increases until after 5 April. If considering a deferral, you will have to consider the impact of the increase in National Insurance Contributions next year which is discussed in our Tax and NIC article.
The Marriage Allowance is available where one spouse or civil partner's income is below their Personal Allowance and the other is a basic rate taxpayer. The Marriage Allowance allows the lower earner to transfer £1,260 of their Personal Allowance to their partner. This could give a tax saving of £252 in 2021/22.
It is also possible to backdate claims for the Marriage Allowance as far as the 2017/18 tax year which could mean a significant tax refund for eligible couples.
You can receive £2,000 of dividends tax-free each tax year. If you are a business owner, you should consider whether it is possible to declare a dividend to make full use of this.
ISAs are investment products that produce tax-free interest, dividends, and/or capital gains. You can invest up to £20,000 into an ISA each tax year.
If you haven't used your full allowance this year, make sure you top up before 5 April 2021 as your allowance doesn't roll over to the next tax year.
If you are aged 18 to 50 (you must start to contribute before you are 40), you can use up to £4,000 of your ISA allowance to contribute to a Lifetime ISA ('LISA') to help save for the deposit on a house. The Government adds a 25% bonus so you can receive up to £1,000 tax-free each year.
Parents and guardians can also save an additional £9,000 per child this tax year in a Junior ISA.
Pensions are one of the most tax-efficient ways to save for your future.
Most people are able to obtain tax relief on pension contributions of £40,000 each year (the limit may be lower for low or very high earners). You may also be able to carry forward your unused annual allowance from the previous three tax years.
You should review your pension contributions since 2018/19 to see if you have any remaining annual allowance.
You have an annual IHT exemption of £3,000 and can carry forward any unused amount from the previous year. Gifts within the limit are fully exempt from IHT even if you do not survive seven years. If you have not already done so, you should consider making gifts to fully utilise your exemptions for 2020/21 and 2021/22. Each year's limit could reduce your IHT bill by up to £1,200.
If you have a high-income tax or CGT liability or wish to reduce your IHT bill, you may consider investing in tax-efficient investments such as Enterprise Investment Scheme ('EIS'), Seed EIS or Venture Capital Trusts. The amount you can invest each tax year is limited to £1m, £100k, and £200k, respectively. If you are considering making any investment, you should discuss with your advisor whether it should be made this tax year in order to fully utilise your allowance.
How Mazars can help
With such a range of allowances available to you each tax year, it is worth speaking to your tax and financial advisors to check if there is anything you should be doing before 5 April 2022 and to ensure that your affairs and investment portfolios are set up to make the best use of all your allowances.
As we approach the final months of the 2021/22 tax year, it is the perfect time to consider whether you have made the best use of your tax allowances available, as these can save you thousands of pounds each year.
In our free guide, we have set out some of the main reliefs and exemptions you should be considering.