This is a thought leadership article by PrimeGlobal member firm Buzzacott (UK) which discusses ways in which you can minimize your 2020/21 UK tax bill.
The 2020/21 UK tax year ends on 5 April 2021, and there are a number of things you can do to ensure that your tax bill for the year (payable by 31 January 2022) is as low as possible. Here we explore a few practical opportunities.
Although there are encouraging signs for the UK in the fight against COVID-19 with an ever increasing number of the population receiving the first dose of the vaccine, there is still a considerable amount of uncertainty as to the immediate future and when we can look to some relaxing of the rules currently in place locking down society.
It was with that uncertainty remaining that the Chancellor announced his Spring Budget on 3 March 2021. He did, however, start to consider how to pay for the various support packages that have been necessary throughout this pandemic and a large increase in corporation tax was one of the headline measures.
With regards to personal taxation, the tax triple lock covering income tax, National Insurance and VAT rates remained in place. The personal allowances and tax bands affecting individuals will increase as promised for the forthcoming 2021/22 tax year, but they will then be frozen until 2026. The highly anticipated increase in Capital Gains Tax (CGT) rates, which was rumoured to bring the CGT rates in line with income tax rates, was not part of the measures and the Chancellor was curiously silent on the issue. Rate changes in the future cannot be ruled out.
So what opportunities could you take advantage of in the run-up to the end of 2020/21? Below we’ve summarised a few of the most common for you to consider. Click the banners to view the opportunities and what you should do for each.
Where available, taxpayers are entitled to a tax-free personal allowance of £12,500 for 2020/21, with the next £37,500 being taxed at 20%. Income between £50,000 and £150,000 is taxed at 40% and anything over £150,000 is taxed at 45%. There are different rates for dividends of 7.5%, 32.5% and 38.1% respectively.
The personal allowance is phased out on income between £100,000 and £125,000, effectively creating a tax rate of 60% on income within this bracket. This can be reduced through the use of Gift Aid donations and pension contributions.
What should you do?
Ensure that there is sufficient income generated where possible to make best use of personal allowances and basic-rate bands. Now that we know personal allowances and tax bands will be frozen for five years, it is more important than ever not to waste them. This may include considering the timing of dividends or trust distributions. In addition, income-producing assets can be transferred between spouses without any liability to capital gains tax to ensure that both spouses are utilising their lower rates of tax.
Where your income is in the £100,000 to £125,000 bracket, consider the possibility of additional Gift Aid or pension contributions.
Where available, taxpayers are entitled to a tax-free annual exemption of £12,300 for 2020/21 on capital gains. Rates are then charged at 10% for any remaining basic-rate band entitlement, with 20% charged on any remaining gains. These rates rise to 18% and 28% respectively for residential property and carried interest.
There are also several important capital gains tax reliefs to consider, such as Business Asset Disposal Relief (BADR). This was previously known as entrepreneurs’ relief and applies a CGT rate of 10% against sales of trading business and shares in a trading company, subject to certain conditions. This is now subject to a £1million lifetime limit, reduced from £10million prior to 11 March 2020.
Private residence relief is also available on any gain on the sale of your private residence, which exempts the gain for the period that it is your main residence as well as open other potential periods to exemption. In many cases, it is straightforward to determine which property is your main residence, although it is possible to nominate a property if you live in more than one property.
The capital gains tax rates are historically low and are subject to frequent speculation that they could increase in the near future. While we cannot predict future Budget announcements, the fact that the Chancellor did not mention it at the recent Spring Budget does not necessarily mean there will not be changes in the future.
What should you do?
Consider whether enough gains can be crystallised each year to utilise the annual allowance, if possible. Again, this is particularly important with allowances being frozen for five years. Also consider whether capital losses can be generated if large gains have already been realised. This may include negligible value claims against worthless assets, where these have not already been realised. It could also involve transfers between spouses before sale, to ensure that any losses are set against other gains. However, this may not always be appropriate, such as if you are envisaging large gains in future years where you think the capital gains tax rate may be higher.
Likewise, if you are planning on making disposals that will crystallise large gains and the circumstances make this possible or advisable, it may be worth making them in this tax year rather than waiting for future tax years where the capital gains tax rates may be higher although also bear in mind that we now know there will be at least one further tax year (2021/22) with the CGT rates remaining as they currently are.
You may also wish to review your Business Asset Disposal Relief position, particularly in the light of the reduction of the lifetime limit last year. These rules have consistently changed in recent years and further changes cannot be ruled out.
Finally, if you have more than one home, consider your private residence relief position and whether an election is needed.
When an individual makes a charitable cash donation within the scope of a Gift Aid election, they can obtain income tax relief at their marginal rate on the grossed up amount of the gift. This covers UK registered charities, and certain overseas charitable organisations. Correspondingly, the charity can reclaim the tax equivalent of 25% of the cash gift.
For example, if a higher rate taxpayer (40%) donates £100 to charity, their basic rate band is extended by £125. Provided the taxpayer pays at least £25 of tax, the charity reclaims £25 (20% of £125) from HMRC. The taxpayer also benefits by £25, by virtue of paying tax at 20% instead of 40% on the grossed up donation of £125.
An additional rate taxpayer (whose marginal rate is 45%) would get enhanced relief of £31.25, i.e. 25% of £125, in the above scenario.
You can donate assets other than cash to charity, such as land or shares. In this case, the market value of the land or shares donated to charity is deductible from your general income, providing relief of up to 45%.
What should you do?
Consider whether you wish to make any further charitable donations in 2020/21 before the end of the tax year. As mentioned earlier, this may assist with bringing your taxable income down below the “60%” band of income between £100,000 and £125,000. If you are planning on making large charitable donations, consider whether it would be beneficial to do so in the current tax year or wait until the start of 2021/22. This may be particularly relevant if, for example, you are considering making larger donations of land and shares and would benefit from a higher rate of tax relief in 2021/22. You should also bear in mind that you need to have paid enough tax to frank the 25% claimed back by charities using Gift Aid, or else your tax liability increases to match that amount.
When an individual makes a contribution to a personal pension (other than via salary sacrifice), they can be eligible for tax relief at their marginal rate. As with donations made under Gift Aid, a taxpayer’s basic and higher rate tax bands are extended by the grossed up pension contribution so that they obtain tax relief at their marginal rate. Relief is limited by the lower of your annual earnings and the annual allowance.
The standard annual allowance for gross pension contributions is £40,000 gross, subject to the level of your income. Between 2016/17 and 2019/20 for those with income in excess of £150,000, the annual allowance was tapered down to a minimum of £10,000 (gross) by £1 for every £2 of adjusted income in excess of £150,000. From 2020/21, the income threshold at which the annual allowance begins to be tapered was raised to £240,000 and the minimum annual allowance reduced to £4,000. Pension contributions in excess of the annual allowance are subject to the annual allowance charge, which effectively claws back the tax relief.
One important thing to note, is that you can carry over any unused annual allowance from the three previous tax years as long as you were a member of a pension scheme in those years.
What should you do?
Consider whether you wish to make any further pension contributions in 2020/21, in particular and where appropriate, ensuring that you do not lose previous years allowances. In 2020/21, unused allowances from 2017/18 to 2019/20 can be utilised and any unused allowance for 2017/18 will be lost after 5 April 2021. This is a particularly complex area, where you should also consider lifetime allowances, which the Chancellor announced in the recent Spring Budget would be frozen at £1,073,000 for the rest of this parliament. Ensure you obtain professional advice if you are in any doubt.
There are a number of tax-efficient investments you may wish to consider in order to reduce your tax liability.
The first and most obvious is an Individual Savings Account (ISA). The annual overall subscription limit for an ISA for 2020/21 is £20,000, which can be invested in cash or certain investments such as stocks and shares. ISAs are available to all UK resident individuals aged 18 or over. There are also Junior ISAs available for those under 18 with an annual limit of £9,000. The main benefit of ISAs is the income tax and capital gains tax do not apply.
Those wishing to invest in start-up companies may also consider the following investment vehicles:
Enterprise Investment Scheme (EIS)
It is possible to invest up to £2 million in EIS, provided anything over £1 million is invested in “knowledge-intensive” companies. These are companies that carried out research, development or innovation at the time they issued, or are issuing shares. You receive an income tax deduction of up to 30% of the EIS investment and have the option to defer capital gains on assets disposed within a certain timeframe, equal to the amount invested.
Seed Enterprise Investment Scheme (SEIS)
You can invest up to £100,000 in the year and receive an income tax reduction of 50%, potentially wiping £50,000 off your income tax bill. Furthermore, you can claim to treat 50% of a capital gain as exempt from capital gains tax in the year you make the SEIS investment (i.e. a gain of up to £50,000).
Venture Capital Trust (VCT)
A Venture Capital Trust might be suitable for you if you are prepared to invest in higher risk funds. You can invest up to £200,000 in a year and receive an income tax reduction of 30%. However, unlike EIS or SEIS, there is no carry back.
What should you do?
Consider maximising your ISA allowance for the year if you have not already done so.
If you are interested in making investments in EIS, SEIS and VCTs, consider whether one prior to 5 April 2021 would be appropriate. It is also possible to carry back any EIS/SEIS subscriptions made in the current tax year to 2019/20, providing the EIS/SEIS limit has not been exceeded in that year. As the 2019/20 Self-Assessment filing and payment deadline has now passed, this will generate a tax repayment.
If you are in a position to consider deferring capital gains on assets disposed, you may wish to consider whether a deferral would be appropriate now and risk a higher capital gains tax rate when the gain recrystallizes in a future tax year.
There are a number of reliefs and exemptions for IHT to consider each year, which could reduce the amount of IHT that your Estate pays on your death. The main allowances are:
- Annual exemptions: Up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in the next.
- Small gifts exemption: You can give up to £250 to as many people as you wish each tax year.
- Gifts out of income: If your income regularly exceeds your expenditure, you can give away the excess if part of a settled pattern.
What should you do?
Consider whether you have utilised all the potential IHT reliefs and exemptions, particularly the annual exemptions which are on an annual basis, subject to the one year carry forward provision. You may also wish to consider whether it is appropriate to obtain a review of your Estate and Inheritance Tax position, as there may be further opportunities to reduce your likely IHT exposure.
At Buzzacott we are trusted for the experience we have, the specialisms we understand, the relationships we build and the values we live by. We define ourselves by the needs of our clients, large and small, and we work hard to build and maintain relationships that are personal, collaborative and enduring – to be a partner you can trust. We blend pragmatism and front-line experience with the insightful knowledge of an industry leader. Our 400+ staff work cooperatively in specialist teams under one roof to tailor-make solutions for you. We’re big enough to display deep knowledge over a broad range of specialisms, and small enough to understand the power of personal connections.Learn more