Get Ready For Tax Year End

Now the festive season is but a distant memory, it’s time to start thinking about 5th of April and your year end tax planning.

After two Budgets in 2021, there should be no spring Budget this year, Covid-19 permitting. However, the Chancellor is expected to make a statement to parliament on 23 March alongside the publication of the latest economic forecasts from the Office for Budget Responsibility.

Good Friday falls late this year, on 15 April, so Easter won’t disrupt the planning timetable.

The Check List

Tax year end checklists change subtly each year, as tax rules change. For 2021/22 the main items are:

Pensions

5 April 2022 is the final date for taking advantage any unused pension annual allowance (of up to £40,000) from 2018/19. These carry forward calculations can be complex, so it important to start this element of planning early.

Normally any pension contribution up to your available annual allowance will reduce your income tax bill, but the more value you already have in your pension, the more you need to check before adding to it.

The same freeze until April 2026 that applies to the income tax personal allowance also fixes the standard lifetime allowance for the next four years.

HMRC statistics show that the number of people exceeding their allowance and paying a tax penalty of up to 55% doubled between 2015/16 and 2019/20 (the latest stats available). A headroom check is therefore a wise precaution.

ISAs

With widespread income tax freezes and an increase of 1.25 percentage points in the tax rates on dividends, the value of the tax shelter provided by ISAs has grown. That probably explains why the Chancellor left the maximum contribution for 2022/23 at £20,000, the same level that has applied since 2017/18.

All types of ISA offer four valuable tax benefits:

• Interest earned on cash or fixed interest securities is free of UK income tax.

• Dividends are also free of UK income tax.

• Capital gains are free of UK capital gains tax (CGT).

• ISA income and gains do not have to be reported on your tax return.

For most basic rate taxpayers, the combination of the personal savings allowance, dividend allowance and CGT annual exemption means ISA tax benefits are largely academic. However, it is a different story if you pay income tax at more than basic rate or have exhausted any of your allowances.

As well as considering fresh ISA investment, you should review your existing ISAs, especially those that may be Cash ISAs.

For example, despite a recent rate rise, the National Savings & Investments Direct ISA pays just 0.35%. Even so, that is 35 times more than Halifax is paying on its instant access ISA accounts!

Remember, lower risk investments can still be held in stocks & shares ISAs, it doesn’t have to be 100% invested in cash or 100% invested in equities.

CGT

Towards the end of last year, a large question mark hanging over the future of CGT was removed. The Chancellor announced that he would not be implementing most of the reform proposals made in a CGT review he commissioned from the Office of Tax Simplification (OTS) in 2020. Ironically, the clarification has simplified year end planning. There is now no need to consider whether to incur a CGT bill today to avoid a potentially larger bill tomorrow.

The year-end CGT exercise is, thus, the normal one of considering whether and how to use any remaining CGT annual exemption (£12,300, again frozen to 5 April 2026).

2021 was a good year for most world stock markets – even the FTSE 100 was up 14.3% – so you may well have gains that can be set against the exemption. In many instances, it will make sense to take maximum advantage of the exemption as it cannot be carried forward to next tax year; use it or lose it.

Unfortunately, you cannot sell holdings one day and buy them back the next to crystallise capital gains, but there are other ways to achieve much the same result, such as using an ISA or or swapping assets with your partner.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)

The lifetime and annual allowance constraints that apply to pensions have encouraged growing interest in VCTs and EISs as an alternative way to invest with tax relief. Subject to generous limits, both offer:

• income tax relief at 30% on fresh investment, regardless of your personal tax rate; and

• freedom from CGT on any profits. While these tax reliefs are attractive, VCTs and EISs are by no means a straightforward substitute for pensions. The focus for VCTs and EISs is on high risk investments in small, relatively young companies – a long way from the typical investment choices for pension arrangements.

Business income planning

If you are a shareholder director in your company, it could be worth bringing forward the payment of any dividend or bonus into this tax year, rather than leaving it until after 5 April.

Higher NICs and increased dividend tax will both arrive after that date, reducing your net income.

The table below demonstrates the impact, based on £10,000 of gross profits being paid to a higher rate taxpayer with no remaining dividend allowance.

Remember too that your company’s corporation tax rate will rise from 1 April 2023 if profits exceed £50,000. At £250,000 or more the new rate will be 25% against the current 19%.

Although it looks like a clear run through to 5 April, that does not mean you should delay your tax year end planning for now. The need for data and detailed calculations makes an early start advisable, particularly if pension contributions are a consideration.

Let me know if you need to arrange for an end of tax year planning review.