With self-assessment season over, now it is time for practitioners to think about year-end tax planning for their clients.
Each year seems to bring with it something new and this year is certainly no exception. The main areas of interest this year will centre around taxpayers seeking to avoid the higher rate of tax of 45% and making use of the current CGT rates and IHT allowances.
Matters to consider include:
Income tax planning For tax year 2020/21, personal allowance for individuals is £12,500 and the next £37,500 is taxed at the basic rate of 20%. Higher rate tax is charged from income of £50,001 to £150,000. Income above £150,000 is chargeable at 45%. Dividend income in these bands is charged at the rates of 7.5%, 32.5% and 38.1% respectively.
It always pays to estimate your income before the end of the tax year to understand which tax bracket it will fall within in order to plan for the resulting income tax liabilities. For full rates and allowances please see ACCA Budget Guide 2020.
Action points can include:
make use of starting rate of savings by paying interest from your own company on your credit director loan account (be vigilant regarding CT61 tax deduction requirements for company though). The personal savings allowance entitles basic rate taxpayers to £1,000 of tax-free savings income and higher rate taxpayers £500. Additional rate taxpayers receive no allowance. Also see our article on loans to companies for other aspects relating to this
use the dividend allowance of £2,000 by paying dividend from your own company (if applicable)
spouses and civil partners should seek to equalise income and utilise their personal allowances and basic rate tax bands, where legally possible. Consider allocation of jointly-held assets and appropriate elections to HMRC on Form 17 for the coming tax year
consider tax planning for residential property finance charge impact as there is no deduction allowed for 2020-21 while calculating your rental profits, which can push you into higher rate brackets and affect child benefit charge if applicable
make pensions contributions but beware of the anti-forestalling rules for high earners
utilise the £3,600 pension limit for non-earners/children
consider making gift aid payments to attract tax relief at the higher tax rate
utilise ISA limits for all family members (including children)
consider Lifetime ISA (LISA) for any children who are above the age of 18 now to get a maximum bonus of £1,000 per year.
As announced on 12 November 2020, Annual Investment Allowance (AIA) has been maintained to the level of £1m until 1 January 2022 (which was originally due to revert to £200,000 on 1 January 2021). Bring forward the capital investments if needed, to boost the cash flow by claiming AIA.
Accelerate directors’ and staff bonuses and employer's pension contribution, where appropriate.
Capital gains tax The current CGT rate of 10% and 20% (residential property 18% and 28%) is payable by taxpayers in basic rate and higher rate respectively. The annual exemption for 2020/21 is £12,300. CGT tips include:
use your annual exemption by crystallising sufficient gains to use up the allowance. If generating gains from shares traded on the stock market, watch 'bed and breakfasting' and matching rule for shares
look at your share portfolio if some of the shares have become valueless: you may be eligible for Negligible Value Claim against your income which is better than capital loss
if you had incurred any capital losses since 2016/17 but no formal claim is submitted yet, then the deadline is 5 April 2021 (4 years after the end of the tax year of the loss)
if clients are considering selling or gifting their businesses, they may be eligible for Business Asset Disposal Relief (formerly known as entrepreneur relief)
before selling a sole ownership property, consider transferring it in the joint name of the spouse or civil partner to use two annual exemptions. However, you may need to seek good advice for other related implications
invest in capital-producing rather than income-generating assets
employers considering share schemes for staff should consider approved schemes which attract CGT rather than income tax treatment.
Utilise IHT exemptions
£3,000 per tax year may be gifted. The exemption for the previous tax year may be used if not already done so
small gift exemptions
And finally, New Tax Year Eve seems to come around quicker every year! Actually, this year, it does, as the end of the tax year falls on Easter Monday. Therefore, for many, the last working day of the 2020/21 tax year will be Thursday 1 April 2021 - something to be aware of when planning your year-end tax planning.