With the end of the 2020/21 tax year firmly on the horizon on 5th April, now is a good time to step back and check you’ve done everything you can to minimise your tax liabilities in the 2020/21 tax year.
We’ve focussed on some of the top personal tax planning points to think about before the end of the tax year:
Use your annual pension allowances
- Annual allowances can be carried forward for a maximum of 3 years – check whether you’ve got any unused allowances from the 2017/18 tax year that you need to use before 5th April.
- Making pension contributions could help reduce your high income child benefit charge if your income is over £50k.
- Making pension contributions could help claw back lost personal allowance if your income is over £100k.
- Make personal charitable donations before 5th April
Again, making personal charitable donations could help reduce your high income child benefit charge if your income is over £50k.
Making personal charitable donations could help claw back lost personal allowance if your income is over £100k
Use your savings allowances
The personal savings allowance means that basic rate taxpayers don't pay tax on the first £1,000 of savings income (higher rate taxpayers don't pay tax on the first £500 of savings income). It's worth looking to see if you can charge interest on directors' loan accounts if you’re a director or shareholder of a company.
Use your £5k savings starting rate band
The starting rate band is taxed at 0% and can be used to some extent if earned income is less than £17,500 and interest income is in excess of the savings allowance. There is potential to use this if you can charge interest on directors loan accounts, keep to a small salary and avoid significant benefits in kind.
Use your £2k dividend allowance
The first £2,000 of dividends received in a tax year are tax free, regardless of your other income, so make sure all shareholders receive at least £2k of dividends, including spouses. Although this level of dividends is tax free, there are some tax implications if your income is between £100k and £125K as they do affect loss of personal allowance.
Utilise the full basic rate tax band
If you are in a limited company, it is important to make sure that the basic rate tax band is utilised in full, for both husband and wife, as this is an extremely tax efficient way of drawing money out of your company. With a basic dividend rate currently of 7.5%, a couple can earn a combined income of £95,600 and pay less than £5,000 tax. This presumes that both husband and wife are shareholders and have sufficient reserves in the company to pay dividends up to the basic rate band for each shareholder, and there is no other income.
Use your £12k capital gains tax annual exemption
Similar to your personal allowance for income tax, every individual has a £12,300 (for 2020/21) capital gains tax annual exemption, which means the first £12,300 of capital gains in the tax year are tax free – check to see if there’s a way you can use this before the end of the tax year. If you don’t use it, you’ll lose it, it can’t be carried forward to future tax years.
As always, if you have any questions on any tax planning opportunities ahead of the tax year end on 5th April, we’ll be more than happy to talk. With the recent exit from the EU and the upcoming Budget* where taxes are expected to rise, now is also a good time to step back and review your whole structure to ensure it is the most tax efficient for your circumstances.
*We will be holding a free live event on the 3rd March at 4PM covering the key points of the upcoming Budget feel free to register here