With the end of the personal tax year on 5 April 2021, 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
CGT is often discussed with a view to simplifying it, bringing it in line with income tax etc but for now, 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.
How we can help you