The 2021/22 tax year end is fast approaching and, with it, the last chance for clients to make use of the valuable tax allowances and exemptions that exist.
To help you and your clients to save tax, we’ve produced a comprehensive guide to the tax year end. This contains loads of useful information and highlights some of the ways clients can boost their wealth by using the tax breaks that are available.
Download your free copy now and please feel free to share this with any clients who may benefit.
In the meantime, here are some of the key steps clients should take before 5 April.
1. Maximise adult ISA contributions
ISAs are a tax-efficient way for clients to build up their savings. And, importantly, if an individual does not use their annual ISA limit, they lose it.
In the 2021/22 tax year, clients can place up to £20,000 into their ISAs, choosing one account or spreading the allowance across several.
Cash ISAs are similar to a traditional savings account, but all the interest paid is tax-free. Returns on Stocks and Shares ISAs are free of both Income Tax and Capital Gains Tax. As with all investments, clients should be thinking of a term of five years or longer when using a Stocks and Shares ISA.
If you have clients aged between 18 and 39 looking to save for a deposit for a first home, they can contribute up to £4,000 a year to a Lifetime ISA (LISA). This is part of the annual £20,000 subscription limit.
This can be a Cash or Stocks and Shares ISA and clients will receive a 25% government bonus on their contributions. Note that there is a penalty if clients make a withdrawal before the age of 60 for any purpose other than buying their first home.
2. Maximise ISA contributions for children
If clients have children under the age of 18, they can contribute to a Junior ISA (JISA) on their behalf. The limit in 2021/22 is £9,000.
The tax treatment of both Cash and Stocks and Shares JISAs are the same as adult ISAs, making them aa tax-efficient way to build up a nest egg for a child. The child can begin managing their ISA from 16, but they cannot withdraw money until they are 18.
Like their adult counterparts, if clients don’t use the allowance before the end of the tax year, they will lose it.
3. Maximise pension contributions
In the 2021/22, most clients can pay up to £40,000 (or 100% of their earnings, if lower) into a pension and benefit from tax relief.
Pensions attract generous tax relief and so making use of this Annual Allowance can help a client to tax-efficiently boost their wealth.
Some clients – for example, higher earners and those already flexibly drawing their pension – will have a lower Annual Allowance. We can establish exactly what a client can contribute tax-efficiently, using “carry forward” to ensure we maximise their tax-efficient savings.
It’s worth reminding clients that it’s not just their own pension that benefits from tax relief. Making use of a loved ones’ Annual Allowance can also help to boost their savings.
Non-taxpayers can add up to £2,880 each tax year to their pension. Contributions benefit from tax relief at the level of Income Tax they pay or at 20% if they are a non-taxpayer.
4. Make gifts
If you have clients who are concerned about Inheritance Tax (IHT), gifting to loved ones now can reduce the value of their estate and, ultimately, their eventual liability.
Each year, the IHT annual exemption means individuals 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. The exemption can be carried forward for one year.
Using this exemption enables clients to pass on wealth that is immediately considered outside of their estate for Inheritance Tax purposes.
Clients may also be able to gift from their income to reduce a potential bill. However, these gifts need to be made regularly and must:
- Be made from income
- Be part of their normal expenditure
- Leave them with sufficient income to maintain their current lifestyle.
This can be a useful way for clients to offer financial support to loved ones while also mitigating a possible IHT liability. For example, they might pay the school fees of grandchildren.
We can work with clients to create a gifting strategy that ensures they pass on wealth and mitigate IHT while ensuring they can maintain their desire lifestyle.
5. Use other tax allowances
There are three other important tax allowances that clients can use before 5 April.
The Marriage Allowance allows a husband, wife, or civil partner to give some of their unused Personal Allowance to their partner.
If a client or their partner has an income below £12,570 (2021/22), the person on the lower income can pass up to £1,260 of their Personal Allowance to the other, effectively increasing their Personal Allowance to £13,830. It’s a step that saves up to £252 in Income Tax.
Download our tax year end guide for specific details of eligibility for this allowance.
Capital Gains Tax annual exempt amount
Capital Gains Tax (CGT) is paid when clients sell certain assets and make a profit. This may include non-ISA investments, a second property, or personal possessions worth more than £6,000 (excluding a car).
For the 2021/22 tax year, the CGT exempt amount means an individual can make profits up to £12,300 before CGT is due. In some cases, spreading out the disposal of assets across several tax years can help reduce a CGT liability.
There are strategies that can minimise the amount of CGT a client might pay. We can help clients with this, so please get in touch to find out more.
If clients hold shares in a dividend-paying company, they will receive payments. Many of your business owner clients may also draw a combination of salary and dividends from their business to maximise the tax-efficiency of their income.
The Dividend Allowance means every individual can receive up to £2,000 in dividends without incurring tax. So, for example, company directors can pay themselves up to £2,000 in dividends from the business without paying any Dividend Tax.
If clients don’t use their Dividend Allowance before the end of the tax year, they will lose it. And, with Dividend Tax rates rising in 2022/23, it will be more important than ever to make use of this valuable allowance.
Get in touch
We’re here to advise you and your clients on all aspects of financial planning, including making the most of tax allowances and exemptions.
Our free guide to the tax year end provides lots more detail and insight as to the ways clients can use the available tax breaks. Download it here, and please feel free to share this with clients, colleagues, or fellow professionals.
If you have clients that would benefit from pension or investment advice, or you’re interested in how you can work more closely with us, please get in touch. Email email@example.com or call 01454 416653.
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.