It’s getting to the time of year where tax planning should be high on everyone’s agenda. The end of the tax year is just a couple of months away and there are some simple steps you can be taking to prepare.
Accountants for entrepreneurs at Alexander and Co. have put together a guide containing their top tips. Let’s take a look at their recommendations and see what you can do to make sure you’re ready to finish the tax year in top form.
First, though, please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
1. Individual savings account (ISA) allowance
If you’re over 18, your current individual ISA allowance will be £20,000. ISAs are great for shielding your savings or investments from tax, making these accounts useful for building long-term wealth.
You can split your yearly allowance between a cash ISA and a stocks and shares ISA. This gives you the best of both worlds, protecting your wealth no matter what your approach. It’s important to remember any unused allowance won’t roll over after 5 April 2021.
2. Dividends
If you’re an investor, some of your investments might pay dividends. If you own a limited company, you may also pay dividends to yourself.
The tax-free allowance is up to £2,000 per year. It’s important to make sure you’re making the most of this if you are in a position to.
3. Capital Gains Tax (CGT)
This can be a vital area of your tax planning. At the moment, you’re able to make gains of up to £12,300 within the tax year before paying CGT. This tax can apply to business or property investments, so you should make sure your allowance is being used in the right way.
The specialist team of accountants for entrepreneurs at Alexander & Co explain: “Unfortunately, your Capital Gains Tax Allowance cannot be carried forward into the new tax year. However, there are ways in which you can effectively utilise whatever remainder you have in the coming months. For example, you may want to sell an asset in order to make up for a capital loss made in the same year. As well as this, it’s also possible for married couples to use each other’s allowances by transferring assets before they are sold.”
Seeking some professional advice on the most tax-efficient options based on your circumstances can be worthwhile.
4. Inheritance Tax (IHT)
Inheritance Tax (IHT) can be really costly if not prepared for in advance. One simple way of tax planning with your estate is to make sure you use up any gifting allowance.
Currently, you can gift up to £3,000 per year with no IHT implications. You’ll be able to carry any unused allowance from this year into the new tax year but it will expire if not used by 6 April 2022.
5. Income Tax and National Insurance
Everyone has a personal allowance of £12,500 for income tax. Any unused allowance can’t be carried over into next year, so it’s a good idea to check if you’ve hit this threshold.
6. Spouses and civil partners
There are many benefits to tax planning with your partner. If they are a non-taxpayer or pay a lower amount of tax than you, they can transfer up to 20% of their unused personal allowance over to you. This could easily save you up to £250 in tax.
Any assets can also be placed under the name of the partner in the lower tax band. Doing this can help reduce any tax liability and, as a bonus, there’s no CGT to be paid when transferring an asset to your partner.
7. Pensions
Your annual pension contribution allowance during this tax year can be 100% of your earned income up to £40,000. This figure can decrease if you’re on a high income or have previously taken benefits.
It’s also worth bearing in mind you also have a Pensions Lifetime Allowance of £1,073,100. Unlike some areas, you can carry forward your unused pension allowance into the next three tax years.
8. Corporation Tax
The main rate is going to be staying at 19% for the next tax year. This can make tax planning for your business a little bit simpler. Just make sure you’ve included this rate in any cash flow projections for the company.
9. Research and Development Tax Relief
This last tip is pretty nuanced in terms of tax planning. However, if you have a business, it may be useful to see if you qualify for this relief. Many business owners wrongly assume that they’re not eligible for this.
As long as you are undertaking a project that seeks to advance knowledge, improve a product or service, or solve uncertainties in a corporate process, you can get this relief. The criteria are pretty broad, so it’s worth checking whether you’re eligible.
