As another tax year draws to a close, now is a good time to take stock and consider whether all allowances and reliefs have been maximised as far as possible and whether any action needs to be taken before the new tax year begins.
We have split the tips into those which are relating to income and those that are capital in nature.
The income points we consider throughout the year as part of the remuneration planning and discuss in our meetings with you. However please let us know if there have been any recent changes in circumstances that we need to consider and which may affect our previous advice.
Income
1. With dividend rates set to increase by 1.25%, it will be worthwhile for directors to consider whether dividends can be paid prior to 6 April 2022 before the rate increase takes effect. The £2,000 tax free dividend allowance per annum should also be utilised as far as possible.
2. Owner managed businesses should review their remuneration package in advance of the new tax year and look to utilise their tax bands as far as possible. A combination of low salary, high interest and dividends could result in tax free income of up to £20,570 (and double that for couples) in 2021/22 and 2022/23, if structured appropriately and depending on the individual’s circumstances.
3. If you have been required to work from home as a result of the COVID-19 pandemic, do not forget to claim your working from home allowance. Where household costs have not been reimbursed by your company or employer, you can claim tax relief for costs at a flat rate of £6 per week or £312 per year. HMRC has also confirmed that for both the 2020/21 and 2021/22 tax years it is possible to claim the allowance for the entire tax year, providing that you have been required to work from home at some point during each year.
4. As the personal allowance is reduced by £1 for every £2 of net income over £100,000, those with income of between £100,000 and £125,140 could end up paying tax at an effective rate of 60%. If your income is close to the threshold it may be worth considering ways to reduce your taxable income. This could be achieved by making pension contributions, charitable donations, deferring income into 2022/23 or transferring income producing assets to your spouse.
5. Taxable income exceeding £50,000 for the year could lead to a claw back of child benefit under the high-income child benefit charge. Once taxable income reaches £60,000 the benefit will be lost in full. Reducing, deferring or transferring taxable income as described above could help to preserve this benefit.
6. Up to £1,260 of your personal allowance can be transferred to a spouse or civil partner if neither of you are higher rate taxpayers, by virtue of the marriage allowance. This is of benefit where one spouse has income of less than the personal allowance (currently frozen at £12,570), with a tax saving of up to £252 per annum.
7. With 100% of mortgage interest relief for landlords restricted to the basic rate of tax since April 2020, you may not receive full relief for your finance costs. There are several ways to minimise the impact of the rules including incorporation, spousal transfers, use of partnerships etc.
8. Consider utilising your pensions allowance, which enables you to contribute up to £40,000 for 2021/22, plus any unused allowance for the previous three tax years. Note, however, that if your adjusted income is more than £240,000, the allowance reduces by £1 for every £2 above this threshold down to a limit of £4,000. This reduction only applies where your ‘threshold income’ (broadly taxable income) is also over £200,000.
Capital
9. If you have any surplus cash, you could look to make a tax efficient investment. There are various options which typically offer income tax relief at 30% (but can be as high as 50%) and with tax free capital gains on disposal. It may also be possible to carry back an investment made in 2021/22 to 2020/21 to accelerate tax relief.
10. The capital gains tax annual exemption for all individuals is £12,300, which you should try and use, where possible. Consideration should be given to the transfer of assets between spouses such that both utilise their annual exemptions on a subsequent disposal or deferral into 2022/23 where the allowance has already been used.