Seven tax tips from 7
With the conclusion of the 2021 Conservative Party Conference earlier this week, anyone hoping that Boris Johnson’s conference address would provide clues to how the Government might raise much needed tax revenues, will have been disappointed. Instead Boris concentrated on bigger-picture ideas and a future commitment to ‘level up’ across the UK.
However, and rather tellingly, Boris has more recently refused to rule out further tax hikes in the future. With this in mind, we look at seven tax allowances that we know to be available now and are worth taking advantage of while you still can.
1. Individual savings accounts
Make sure to use your annual individual savings account (ISA) allowance of £20,000 each tax year, or it will be lost forever. ISAs allow you to earn interest and dividends free of tax, and withdrawals don’t suffer any capital gains or income tax. ISAs can help to provide greater flexibility and higher net income in retirement, when used strategically with pension income.
2. Pension contributions
Tax relief on pension contributions can provide a real boost to future income. Whilst taxpayers benefit the most, with higher allowances for paying into pensions and higher tax reliefs, non-taxpayers can also contribute to a pension, receiving a 20% boost on up to £3,600 a year.
If you have been unable to make full use of your contribution allowances over the previous three tax years, you might be able to benefit from making a larger contribution in the current tax year. Making a larger contribution in anticipation of an imminent retirement could also boost the tax-free cash available.
3. Salary sacrifice and bonus sacrifice
If your employer will allow you to make pension contributions via salary sacrifice, you can benefit from immediate tax relief and a national insurance saving on these contributions; your employer might also pass on some of the employer national insurance savings. Making a bonus sacrifice into your pension also benefits from tax and national insurance savings, but you might need to decide to make the bonus sacrifice before you know the size of the bonus!
4. Capital gains tax and gifts to your spouse or civil partner
This tax year’s capital gains tax (CGT) allowance is £12,300 per individual. Should you have unwrapped assets, outside of say a pension or ISA, then it can be useful to make use of the annual CGT allowance to avoid storing up higher future tax liabilities. Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT allowance for the year; if the recipient pays tax at a rate lower than the individual making the transfer, any gains over the allowance could also suffer less tax.
5. Gifting out of excess income
Gifts made in a person’s lifetime might be added back into an estate and possibly subject to inheritance tax (IHT) if they are given away less than seven years before death. Whilst gifts of up to £250 per individual would likely be exempt, as would gifts for weddings or civil partnerships within set limits, i.e. £5,000 to a child, using the gifting out of excess income rule can allow larger gift to be given without them likely becoming subject to IHT.
Grandparents might, for example, wish to use excess pension income to pay for school fees, or pay for an indulgent annual family holiday; an aunt or uncle might want to provide for university fees or maintenance. Planning is key when setting up this kind of arrangement, but it can be a very useful way to pass wealth to other family members that might otherwise risk being subject to IHT.
6. Venture capital trusts
If you have maximised your pension contributions, fully subscribed to your ISA and it is suitable for you to invest some of your wealth in a higher-risk strategy, investing in venture capital trusts (VCTs) can provide immediate and longer-term tax benefits. VCTs invest in innovative smaller companies, usually at an earlier stage of company development, and provide tax-relief of 30% of the investment on the first £200,000 per annum. The investment needs to be held for at least five years to retain the tax relief, but dividends and capital gains on this investment are also tax free.
Please note VCTs carry a higher degree of risk, therefore it is essential that you consult a Financial Adviser/Planner to see if these would be suitable for you.
7. Onshore Investment Bonds
UK investment bonds are taxed differently to other UK based investments, allowing investors to take advantage of some useful tax planning opportunities. There is no future liability to basic rate income tax or CGT on any bond gains, offering higher rate taxpayers the opportunity to invest while paying higher rates of tax, and make withdrawals when they might be subject to lower rates of tax, perhaps in retirement. Should withdrawals need to be made before a reduction in tax is applicable, 5% of the amount invested can be withdrawn without any immediate liability to additional tax, and unused allowances can be rolled forward.
The key to maximising tax efficiencies is in the detail and the planning. We would be delighted to discuss these tax-saving opportunities, or any other aspect of financial wellbeing, with you.
The information contained in this document does not constitute investment or tax advice. Tax rules are subject to change and taxation will vary depending on individual circumstances.
Any reference to specific instruments within this article does not constitute an investment recommendation.
The key to maximising tax efficiencies is in the detail and the planning.”