I am sure that you will have a year-end tax planning checklist that you will be reviewing very shortly. If not, then perhaps consider our main year end tax planning suggestions below.
You should take action before the end of the tax year, on 5 April, to ensure that you can make the most of the tax saving opportunities available to you and possibly to your family and/or your business.
Increase in dividend tax rates
Each person can receive £2,000 pa in dividends completely tax free. The rate of dividend tax will increase on 6 April 2022, by 1.25%, from 7.5% to 8.75%. If you are considering taking dividends from your company in the near future then you may wish to consider paying higher levels of dividends before 6 April 2022.
However, what you do not want to do is take your total taxable income into the higher rate tax band, which for 2021-23 is £50,270. If you do this then your marginal rate of dividend tax will increase from 7.5% to 33.75%. The 1.25% is not a massive amount, though as one supermarket says, ‘Every little helps’.
Pensions and gift aid donations
If your income is approaching the higher rate tax band, of £50,270, and you have some surplus funds, then you could consider making a pension contribution. It would only cost you £600 to get £1,000 into your pension, once tax relief is factored in. If you want to make regular monthly contribution pension contributions then you could consider setting up a low cost auto enrolment pension scheme to make employer contributions from your limited company. Speak to me if you want advice on this.
For small pension contributions you do not have to generate your own earnings from employment or self-employed. Contributions of up to £3,600 gross (£2,880 personally and £720 from HMRC) can be made to a pension scheme for yourself, a spouse, civil partner or child, even if you/they have no earnings of their own.
Similarly, making gift aid contributions is highly tax efficient and benefits charities. If you are a higher rate taxpayer, paying £800 to a charity through the gift aid scheme would reduce your taxable income by £1,000; and you would also receive a tax refund of £200. In other words, just like a pension contribution, it would only cost you £600 to give £1,000 to a charity. The charity would reclaim £200 on your £800 donation. You must provide the charity with a Gift Aid declaration. You cannot just make the donation for it to be effective for tax purposes.
Spouses and partners
Your spouse or partner does not have to be a liability. They can be a great tax asset. You may be able to transfer some of your income, like dividends, rental income and interest received, generated from your assets. If one of you is a higher rate taxpayer and the other a basic rate then there is a clear tax advantage to transferring income.
Even if you don’t have assets that generate significant income, you may be able to pay your spouse or partner a salary or let them charge your company on a self-employed basis. This doesn’t have to be for making cups of tea and answering the telephone, which is a bit of a sexist and out dated example. They could be responsible for updating your website, marketing, writing blog articles or even doing some of your lower level work that you could delegate to them.
You may also be able to take advantage of the marriage allowance and transfer 10% of the personal allowance to your spouse. This does not apply unless you are married or in a civil partnership.
High Income Child Benefit Charge
If you have children, and claim Child Benefit, it may be beneficial to transfer income from one spouse to the other, to try and keep both spouses’ incomes below the £50,000 threshold for the High Income Child Benefit Charge. If any spouses’ income exceeds £50,000 then some of the Child Benefit must be repaid. In income exceeds £60,000 then all of the Child Benefit received in the tax year must be repaid. This is dealt with through the Self Assessment tax system and is not an automatic claw back. You may therefore need to register and file a Tax Return even if you do not normally receive a Tax Return.
In fact, whilst Child Benefit is normally paid to the mother, it could be the father or step-father that suffers the claw-back as their income maybe higher, especially if the mother is responsible for child care and may not be working or earning as much.
Being a higher rate taxpayer, and paying an extra 20% compared to a basic rate taxpayer, and also having the Child Benefit clawed back can be very expensive. Therefore, consider transferring income, if possible, or making pension contributions or gift aid donations.
A family can elect not to receive Child Benefit, especially if they expect they will have to repay the whole amount. However, those who choose to opt out of the system should still make a type of protective claim. Parents, and in particular mothers, who stay at home to bring up the children can receive credits to their National Insurance record which will count towards their state pension. So whilst they do not receive any Child Benefit, or repay anything, they receive valuable state pension credits.
Capital gains tax
The annual capital gains tax exemption remains at £12,300 for 2021-22. Gains above this level are taxed at 10% / 20% for basic rate and higher rate taxpayer unless you are disposing of residential property when the rates increase to 18% / 28% respectively.
If you have assets that have increased in value and may result in the capital gains tax liability then you could consider selling the asset to realise a gain. If the gain is less than £12,300, and so long as you do not dispose of any other assets in the tax year, then there would be no capital gains tax liability. Even if there is a tax liability, the first £12,300 would be tax-free. You need to be careful not to buy back the assets within the next 30 days. This is to stop the bed and breakfast rules being invoked. You could of course get your spouse or partner to buy back the asset if you wish to hold on to them.
Assets transferred between spouses or civil partners do not normally give rise to a capital gains tax liability. The annual exemption cannot be carried forward or transferred, so aim to make disposals before 6 April to use this annual exemption.
Tax efficient investments
You can invest up to £20,000 pa into an ISA, if you are over the age of 18. Investments can be into a cash ISA and/or a stocks and shares ISA, and in any mixture of amounts, so long as the annual limit of £20,000 is not exceeded. Income (in the form of interest and dividends) and capital gains arising from the ISA are tax free.
Parents, grandparents, relatives or friends can invest up to £9,000 pa on behalf of a child into a Junior ISA for children, under the age of 18, who do not already have a Child Trust Fund. Investments can be made into cash and/or stock and shares. No withdrawals are allowed until the child reaches the age of 18. Alternatively, a Junior ISA can be rolled over into an adult ISA is the money is not immediately required and in order to retain their tax free status.
Lifetime ISAs are available to those aged between 18 and 40. Annual contributions of up to £4,000 pa are permitted. A government bonus of 25% is available if funds are not withdrawn other than for two specific reasons. Firstly, to fund the purchase of a first home, and, secondly, withdrawn after the age of 60 e.g. to fund retirement. Contributions can only be made by individuals aged under 50 year old. The 25% bonus is lost if the conditions are breached.
Bank and similar interest on savings
The Personal Savings Allowance allows a basic rate taxpayer to receive up to £1,000 of savings income (interest) completely tax free. For a higher rate taxpayer the tax free amount is reduced to £500.
This blog article is posted for general information only. No liability can be accepted for errors, omissions or the opinions and suggestions made. You should always receive personal professional advice before applying anything mentioned in this blog to your own particular circumstances. Tax law is subject to change. This blog article represents our understanding of the law at 3 March 2022.