With the end of the personal tax year on 5 April 2022, there is still time to use unused tax reliefs to optimise the tax position.
Clearly adequate funds need to be in place to pay for day-to-day lifestyle and cover the essential outgoings but there are several ways to shield income and savings from tax and allow you to protect more of your wealth.
Top up your pension
Individuals can contribute up to 100% of their income (up to the annual limit of £40k) each year into a pension scheme. Contributions attract tax relief depending on your tax rate and you can look back 3 years to top up contributions up to the annual limits. That’s a potential maximum tax-free contribution of £160,000 for the current and previous 3 years.
You could also ask your employer about exchanging some salary for a larger employer pension contribution. This can be an attractive option to the employer who benefits from NIC savings.
Individuals can contribute up to £20,000 into an ISA each tax year although this allowance can’t be carried forward so really is a ‘use it or lose it’ scenario. Contributions can be split between cash and investment ISAs with the key advantages being there is no income tax or capital gains tax to pay on interest. ISA income is not reportable on the Self-Assessment Tax Return.
Capital Gains Tax
Individuals can make tax-free gains of up to £12,300 in each tax year when selling investments.
There are separate tax rules for selling business assets and gains can be ‘held over’ when investing in tax-efficient schemes such as the Enterprise Investment Scheme.
Capital losses can be offset against capital gains or other gains made in the same tax year. Any remaining loss can be carried forward for offset against future capital gains.
If you own an estate worth in excess of £325,000, you could consider gifting within the £3,000 annual exemption to save tax. This annual exemption can be carried forward to one year. Other tax-free gifting schemes include:
- Gifting up to £250 to as many people as you want
- Wedding gifts of up to £5,000 to a child, £2,500 to a grandchild and £1,000 to a relative or a friend
- Gifts from surplus income – but you must maintain your usual standard of living
Trading income relief
Sole traders can claim up to £1,000 in tax relief against their trading income each tax year. However, this can’t be claimed if expenses and capital allowances are used against income.
Tax Efficient Investments
Enterprise Investment Scheme (EIS) Investors can claim up to 30% income tax relief on EIS investments. The maximum investment you can claim relief on in a tax year is £1 Million, which amounts to £300,000 of income tax relief. Please note from 6 April 2018 the cap was increased to £2 Million provided at least £1 Million is invested in Knowledge Intensive Companies (KICs), plus capital gains tax exemption on any profits that arise from the sale of shares after three years.
Seed Enterprise Investment Scheme (SEIS) Investors can claim up to 50% income tax relief on SEIS investments. The maximum investment you can claim relief on in a tax year is £100,000, which amounts to £50,000 of income tax relief, plus capital gains tax exemption on any profits that arise from the sale of shares after three years.
Venture Capital Trusts (VCTs) Investors can claim up to 30% income tax relief on the amount invested, provided you keep your VCT shares for at least five years. The maximum investment you can claim relief on in a tax year is £200,000, which amounts to £60,000 of income tax relief. Although most VCT’s are growth investments and any growth is tax free, the majority of returns are normally paid through tax-free dividends.
Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year). To benefit as a couple, the lower earner must normally have an income below the Personal Allowance – this is usually £12,570 and the higher earner pays income tax at the basic rate.
Gifts between spouses are exempt transfers for IHT. You do not pay Capital Gains Tax on assets you give or sell to your husband, wife or civil partner as these are deemed to be transfers at no gain/no loss.
You may be able to claim tax relief for additional household costs if you have to work at home on a regular basis. This includes if you have to work from home because of coronavirus (COVID-19). If you pay 20% basic rate of tax and claim £6 a week you would get £1.20 per week in tax relief.
If you pay tax above the basic rate, you can claim the difference between the tax rate you pay and basic rate tax on your donation. If you donate £100 to charity they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).
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