2021 was a busy year for financial announcements in the UK. With various allowance freezes, a new Health and Social Care Levy, and the suspension to the State Pension triple lock, preparing for the tax year end is more important than ever.
The end of the tax year is fast approaching, but there’s still time to make use of the tax efficiencies available before the new tax year starts on 6 April 2022.
Here are 5 simple tasks that can help you navigate the tax year end as tax-efficiently as possible.
1. Top up your pension to make the most of the Annual Allowance
In the 2021/22 tax year, the Annual Allowance is £40,000 or 100% of your earnings, whichever is lower. This is the maximum amount of tax-efficient pension savings you can accrue in this tax year.
You’ll automatically receive tax relief at the basic rate of 20%. So, to increase the size of your pension pot by £100, you will only have to contribute £80.
Higher- or additional-rate taxpayers can claim a further 20% or 25% tax relief (depending on the rate of Income Tax you pay) through your self-assessment tax return.
If you want to maximise your tax-efficient pension savings, consider maximising your contributions before 5 April.
2. Top up your ISAs
The ISA allowance for the 2021/22 tax year is £20,000. This is spread over all the ISAs you hold so, for example, if you have a Cash ISA and a Stocks and Shares ISA, you could pay £5,000 into your Cash ISA and add up to £15,000 to your Stocks and Shares ISA.
ISAs are tax-efficient, so making the most of this allowance is a great way to boost your finances.
Every adult has an ISA allowance, so you may want to make sure your spouse or partner is maximising their ISAs too.
You don’t pay tax on the interest you earn on a Cash ISA, while Stocks and Shares ISA gains are free of Income Tax and Capital Gains Tax (CGT).
With your annual ISA allowance, you either use it or lose it. So, make sure you maximise your 2021/22 tax year contribution before it’s too late.
3. Remember to top up Junior ISAs too
If you have children under 18, you can contribute up to £9,000 per child into a Junior ISA (JISA). This is a great way of saving for a child or grandchild tax-efficiently.
As with adult ISAs, all returns from a JISA are paid free of Income Tax and CGT. And, as with other types of ISA, you can’t “carry forward” any allowance, so it’s important to make the most of it before 5 April.
Payments made from capital fall within your small gift exemption of £250 a person each year, or your annual exemption of £3,000. Contributions above either of these thresholds could become liable for Inheritance Tax (IHT) if you die within seven years of making the payments.
Alternatively, you can set up regular payments to a JISA. As long as your payments are made from income and your lifestyle isn’t adversely affected, the contributions are exempt from IHT.
The JISA will automatically pass to your child on their 18th birthday. They can then spend the money as they wish or keep saving by rolling it into an adult ISA.
4. Make the most of your Dividend Allowance
If you have a share portfolio that isn’t invested in a tax-efficient vehicle such as an ISA, you may be liable to pay tax on any dividend income you receive from these shares. If you own your own business, you may also pay yourself using a combination of salary or dividends.
The first £2,000 you receive in any tax year is tax-free, but after that you’ll be taxed according to your Income Tax band:
• 7.5% if you’re a basic-rate taxpayer
• 32.5% if you pay at the higher rate
• 38.1% if you pay at the additional rate.
It’s worth remembering that the rate of dividend income tax is increasing by 1.25 percentage points on 6 April 2022.
If you can, make sure you make the most of your Dividend Allowance of £2,000 before 5 April as you won’t pay any tax on these dividends.
5. Reduce Inheritance Tax liability through financial gifts
The Inheritance Tax nil-rate band and the residence nil-rate band have both been frozen until at least 2026, which might cause you concern about the tax liability you’ll leave behind.
One way to help mitigate Inheritance Tax (IHT) is to manage your estate through financial gifts.
The annual exemption allows you to gift up to £3,000 in cash or assets each year without the gift forming part of your estate for IHT purposes.
The limit is per individual and can be carried forward for a year. So, if you haven’t used your gift allowance for the 2020/21 tax year, now is a great time to revisit this.
Make use of the exemption before 5 April 2022 and check whether you or your partner have any unused exemption from last year. As a couple, you might be able to gift up to £12,000, and lower any future IHT liability.
Get in touch
If you’d like help to make sure you take full advantage of the tax efficiencies available before the end of the current tax year or would like to get a jump start on setting yourself up for the new tax year, get in touch. Email firstname.lastname@example.org or call us on +44 1689 493455.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.