While we may have seen the back of an uncertain 2021, another year end is just around the corner.
The 2021/22 tax year ends on 5 April and so now is your last chance to use the valuable tax allowances and exemptions that are available. Considering that many of them cannot be carried forward, acting now can help you to reduce your tax liability and boost your wealth.
To help you, we have produced a comprehensive tax year end guide that outlines the steps you should consider before 5 April. Download your copy now, and read on for five of the most important allowances and exemptions to use before the tax year end.
1. Use your pension Annual Allowance
Pensions are a highly tax-efficient way to save for your retirement. So, making the most of your contributions can help you to build up the fund you need.
The pension Annual Allowance is the maximum that you can pay into your pension each tax year while still benefiting from tax relief. In the 2021/22 tax year, the Annual Allowance is 100% of your annual earnings, up to £40,000 for most people.
If you have started flexibly drawing from your pension, or you earn more than £240,000, your Annual Allowance may be lower. It’s important to know what your Annual Allowance is, so please contact us if you’re unsure or have any questions. Our tax year end guide may also help.
Using the pension Annual Allowance can help you to make the most of your pension contributions by benefiting from the maximum amount of tax relief available. 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 the most of your ISAs
ISAs are a tax-efficient way to save or invest. Interest on a Cash ISA is paid tax-free, while returns on Stocks and Shares ISAs are free of both Income and Capital Gains Tax.
For the current tax year, you can place up to £20,000 into ISAs, choosing one account or spreading the allowance across several. Don’t forget the allowance is for an individual, so couples can save up to £40,000 tax-efficiently.
On top of this, you can save £9,000 into a Junior ISA (JISA) for any child under the age of 18. The tax treatment of JISAs is the same as adult ISAs.
If you don’t use your ISA allowance by the end of the tax year, you lose it. So, it can pay to make the most of your ISAs before 5 April.
3. Use your Capital Gains Tax annual exemption
You will pay Capital Gains Tax (CGT) when you sell certain assets (such as non-ISA investments or a second property) and make a profit.
In the 2021/22 tax year, the annual CGT exempt amount 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.
Spreading out the disposal of assets across several tax years can help reduce your CGT liability. Note that, if unused, the Capital Gains Tax annual exemption cannot be carried forward.
There are strategies that you can use to minimise the amount of CGT you might pay, so please get in touch to find out more.
4. Use your Marriage Allowance
The Marriage Allowance allows a husband, wife, or civil partner to give some of their unused Personal Allowance to their partner.
If you or your partner has an income below the Personal Allowance (£12,570 in 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.
You must be married or in a civil partnership to benefit, and the partner with the higher income must pay Income Tax at the basic rate in England and Wales, or the starter, basic or intermediate rate of Income Tax in Scotland.
Note that the Marriage Allowance can be backdated for up to four years, so you won’t lose the 2021/22 allowance at the start of the new tax year.
5. Make your gifts
If your estate is worth more than £325,000, it’s possible that you will have an Inheritance Tax (IHT) liability when you die. If you’re concerned about IHT, gifting to loved ones now can reduce the value of your estate and, so, the eventual tax bill.
Taking advantage of gifts that fall immediately outside of your estate can provide peace of mind.
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. Furthermore, as the exemption can be carried forward for one year, a couple could gift up to £12,000 using a previous year’s exemption.
In addition to the gifting allowance, you can gift small amounts (up to £250 per person) to as many people as you like.
There are also many other ways you can reduce Inheritance Tax. Please get in touch if you’d like to discuss your options.
Get in touch
As well as these steps there are other tax allowances and exemptions you can use before 5 April. Download our comprehensive tax year end guide now to find out more.
If you’d like to discuss the steps you should take before the tax year end, please get in touch. Email firstname.lastname@example.org or call us on 01189 876655.