Well, 2021/22 has been another challenging year, due to the continuing Covid-19 restrictions and concerns. However, the equity markets did perform well so did you make use of your tax allowances?
As we approach the end of another tax year (5th April), why not take this opportunity to take a look at your finances and make the most of the allowances available before it’s too late.
As the title suggests, if you do not use your allowances before 5th April, you may lose them forever!
- Pension contributions
Pensions offer a tax-efficient way to invest for the long term. With tax-relief on contributions, tax-efficient growth within the pot and when accessing the pension, 25% of the fund is completely tax-free! This is a long-term investment though; you cannot access this fund until age 55 (this is due to increase to 57 in 2028).
You can receive tax-relief on contributions of up to 100% of your relevant earnings (e.g. your salary and bonus), but you can only receive tax-relief on earnings in the current tax year. Higher earners could even help mitigate the impact of losing their personal allowance or child benefit payments with a pension contribution. Employees may also consider taking a bonus as a pension contribution (if their employer is happy to do so) and business owners could consider taking profits as a pension contribution.
For those with lower (below £3,600) or no earnings this tax year, contributions of up to £2,880 can still be made, meaning that a maximum of £720 would be added to your pension pot in tax-relief.
In addition to tax relief, you may need to consider the annual allowance, which limits contributions to £40,000 in the current tax year. However, most of us can carry forward any unused annual allowance from the 3 previous tax years. This can be subject to complications including ‘tapering’ for higher earners and the money purchase annual allowance for those with flexibly accessed pensions. This is a complicated area and again, we strongly recommending that you seek professional financial advice.
- ISA allowance
This is a ‘use it or lose it’ allowance, so make sure to act before the tax year ends.
ISAs are simple and putting your savings or investments in to an ISA keeps your money free from tax.
In 2021/22 you can protect up to £20,000 using your ISA allowance. This allowance can be split between different types of ISA; stocks & shares, cash, lifetime or innovative finance ISA. However, the lifetime ISA limit is capped at £4,000, so if you do use this allowance, you can add the remaining £16,000 into any of the other ISA options.
If you are a couple, the allowance means a max of £40,000 could be sheltered within an ISA (or ISAs) in one tax year. For children, you may also consider the junior ISA with an allowance of £9,000 this tax year.
Where you are investing in to an ISA, always consider speaking to an independent financial adviser before proceeding.
- Capital Gains Tax
When we profit on something, we create a capital gain. Most things like our home, cars and typical household possessions are exempt from tax concerns. However, investments and shares held outside of tax wrappers (such as a pension or ISA), properties other than our home and some other items, when sold at a gain can become subject to capital gains tax (CGT).
For gains that are potentially subject to CGT, the allowance for 2021/2022 remains at £12,300. To make the most of this allowance you can switch between similar investments or make use of a spouse’s allowance by transferring assets between spouses. You can also use capital losses to offset gains, with previous losses available to carry forward indefinitely, providing you have notified HMRC of the loss within 4 years of it occurring. CGT planning can be very complex, so again please do speak to a financial adviser.
- Inheritance Tax
Depending upon factors such as your age and the value of your estate, you may want to reduce your potential inheritance tax (IHT) bill. There are a number of IHT allowances which are time and tax year sensitive. Using these allowances might mean you can mitigate the IHT charge of 40% on estates over £325,000, although the residence nil rate band is now helping many to remain outside of IHT issues, so please check your potential liability first.
To start with, there is the £3,000 gift exemption; you can reduce your taxable estate here without any complications and you can also carry forward any unused gift allowance from the previous tax year.
There is also the £250 small gifts exemption. You can make as many gifts of up to £250 per person, per tax year as you wish free of IHT. This is providing the recipient is not also part of your £3,000 annual exempt amount.
There is also the gifting under ‘normal expenditure’ exemption. If you start up regular gifts of any amount, this is usually exempt from any IHT concerns, providing this does not impact your own standard of living.
Keeping a record of any gifts will help make things a lot easier for the executors of your estate. IHT planning can potentially save significant amounts of tax so it is always worth having a professional review of your own circumstances if you have concerns.
- Marriage and other allowances
In addition to the areas above, if you are married and your spouse is not using their full personal allowance you can also claim the marriage tax allowance.
And if you are nearing state pension age, you can boost your state pension if you are not likely to receive the full entitlement or even making the most of the personal savings allowance/dividend allowance.
If you have worked from home this tax year, as so many of us have, you may also be eligible to claim tax relief. Why not have a quick look to see if you are eligible and claim online; https://www.gov.uk/tax-relief-for-employees/working-at-home
These small allowances could help you save money this year. However, we always advise that you speak to a professional who can help you plan for the long term and ensure your finances are up to date.
The content of this blog is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change.
The Financial Conduct Authority does not regulate taxation and trust advice. Active Chartered Financial Planners recommends you speak to a Tax Adviser/Accountant for this; Active would be happy to introduce you to one of our close partners.