The tax year end is a great opportunity for you to make the most of the valuable tax allowances that are available to you.
Whether it’s maximising your pension contributions, gifting, or saving into an ISA, many of these exemptions and allowances don’t roll over. So, if you don’t use them, you could lose them.
To help you save tax and boost your wealth, we’ve produced a comprehensive 2021/22 and of tax year guide. Download your guide now or keep reading for five of the most important tasks to do before 5 April 2022.
1. Maximise your pension contributions
The pension Annual Allowance is the maximum that you can pay into your pension each tax year while still benefiting from tax relief. This includes pension contributions made by your employer or other third parties.
Each year, you can use your pension Annual Allowance to maximise your tax-efficient contributions. In the 2021/22 tax year, the Annual Allowance is 100% of your annual earnings, up to £40,000.
If you earn more than £240,000 or you’re already flexibly accessing your pension pot, your Annual Allowance may be lower than this. Download our guide to find out more.
Any unused pension Annual Allowance can be carried forward for up to three tax years. So, this is your last chance to make full use of your allowance from the 2018/19 tax year.
2. Make gifts
If your estate is worth more than £325,000 (or £500,000 if you plan to leave your home to your child or grandchild), then you may be concerned about paying Inheritance Tax (IHT) when you die.
Gifting to loved ones now can reduce the value of your estate and, so, the eventual bill. However, not all the gifts that you make are immediately exempt from IHT. Some may be considered part of your estate for up to seven years.
Taking advantage of gifts that fall outside of your estate immediately can be a sensible way to deal with a potential IHT liability.
Each year, your IHT annual exemption means you can pass on a tax-free amount. In 2021/22, this amount is £3,000. The limit applies per individual, so couples can gift up to £6,000 between them.
Making £3,000 of gifts allows you to pass on wealth that is immediately considered outside of your estate for Inheritance Tax purposes. Remember that the exemption can only be carried forward for one year.
3. Pay into your ISA
ISAs are a tax-efficient way to save or invest. In the current tax year, you can place up to £20,000 into ISAs, choosing one account or spreading the allowance across several.
Cash ISAs operate like a savings account, except the interest you earn is tax-free. Stocks and Shares ISAs allow you to invest in the stock markets and other assets, and all returns are free of both Income and Capital Gains Tax.
As with all investments, you should have a long-term outlook when using a Stocks and Shares ISA.
If you’re aged between 18 and 39 you can save up to £4,000 of your annual ISA allowance into a Lifetime ISA. This can be either a Cash or Stocks and Shares ISA, and you will receive a 25% government bonus on your contributions.
Bear in mind that you will be penalised if you make a withdrawal before you turn 60 for any purpose other than buying your first home.
If you have a child under the age of 18 then you can contribute up to £9,000 to a Junior ISA in their name. Like their adult counterparts, interest and returns are tax-free.
If you don’t use your adult or Junior ISA allowance by the end of the tax year, you lose it. So, it’s worth trying to make the most of your allowance.
4. Use your Capital Gains Tax exemption
If you sell certain assets – such as investment property, or non-ISA investments – you may pay Capital Gains Tax (CGT) on the profits you make.
Each year, you benefit from a CGT exempt amount. In 2021/22, this means you can make profits up to £12,300 before CGT is due. If you exceed this allowance, your rate of CGT will depend on other taxable income:
- Standard CGT rate: 18% on residential property, 10% on other assets
- Higher CGT rate: 28% on residential property, 20% on other assets.
In some cases, spreading out the disposal of assets across several tax years can help reduce your CGT liability. If you don’t use the CGT annual exemption, you can’t carry it forward. So, it can pay to make the most of it.
There are strategies that you can use to minimise the amount of CGT you might pay – get in touch with us to find out more.
5. Use your Dividend Allowance
If you’re a business owner and you take part of your income as dividends, or you hold shares in a company that pays dividends, then it’s important to maximise your Dividend Allowance.
The Dividend Allowance means every individual can receive up to £2,000 in dividends in the 2021/22 tax year without incurring tax. So, for example, if you’re a company director, you can pay yourself up to £2,000 in dividends from the business without paying any Dividend Tax.
How much tax you pay on dividends that exceed the allowance will depend on your Income Tax band:
- Basic rate: 7.5% (rising to 8.75% in 2022/23)
- Higher rate: 32.5% (rising to 33.75% in 2022/23)
- Additional rate: 38.1% (rising to 39.35% in 2022/23)
If you don’t use your Dividend Allowance before the end of the tax year, you will lose it.
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Our comprehensive guide to the 2021/22 tax year end contains lots of useful information and tips that could help you to reduce your tax liability and boost your wealth.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.