Tax Year End Planning Tips
The tax year end is right around the corner. With only a few weeks remaining, it's handy to understand what options are available to maximise your tax efficiency before the new tax year kicks off after 5th April. Anees Hussain from our Tax Team explains more.
Capital Gains Tax – Annual Exemption Amount
One of the main ways to be more tax efficient before the year end is to fully utilise your capital gains allowance. An individual can make capital gains of up to £12,300 without being subject to any tax. One way of achieving this is to sell and then buyback any share investments you may have. This is a good way of increasing the base cost for any future sales – in other words, you can potentially reduce your future tax bills. It is worth pointing out that any repurchase will need to be made after 30 days of the initial sale in order to benefit.
As an aside, any gains over the annual exemption amount of £12,300, will subject to capital gains at a rate of 10% for basic rate taxpayers and 20% for higher rate taxpayers. An additional 8% is applied to these respective rates if the disposal relates to a residential property.
Avoiding the personal allowance erosion
The personal allowance for individuals (the amount you can earn tax-free) is currently £12,570. However, those who are deemed to be high-income earners may see an erosion of their personal allowance. If your taxable income exceeds £100,000, your personal allowance will be reduced by £1 for every £2 of income that exceeds £100,000. This will mean that anyone who has a taxable income over £125,140 will see their personal allowance eroded completely.
As an illustration, if you were to receive a pay rise from £100,000 to £115,000, you would subsequently lose £7,500 of your personal allowance. You would be subject to 40% tax on the normal £15,000 pay rise, amounting to £6,000. You would also be taxed on the lost personal allowance of £7,500 at 40%, amounting to £3,000. You would therefore be paying £9,000 tax on the £15,000 pay rise – an effective tax rate of 60%.
For anyone in such a position, the best way to retain your personal allowance would be either to make gift aid donations or personal pension contributions.
By making gift aid donations, you will reduce your taxable income, in addition to extending your basic rate tax band (currently at £37,700) by the gross amount of any gift aid payments you make. Gift aid payments will be grossed up by the UK Government by 20%. If you make a gift aid payment of £10, for instance, this will be grossed up to £12 at no additional cost to you. By extending your basic rate band by this £12, you will be taxing more of your income at 20%, as opposed to 40%.
Likewise, personal pension contributions can also have the same tax impact in terms of providing additional relief at your basic rate of tax. Pension contributions can be a good way of planning for the future whilst also potentially being very tax efficient.
Retaining child benefit entitlement
Couples receiving child benefit, where at least one person earns more than £50,000, will begin to see their entitlement to that benefit eroded too. If one of the couple has income exceeding £60,000, they will then have to repay the entire child benefit they have claimed for that tax year. The child benefit entitlement is calculated against the highest earning partner – i.e. the combined income is not factored in. Simply put, should one person earn more than £50,000, then child benefit is eroded.
Child benefit is eroded at a rate of 10% for every £1,000 earnt above the £50,000. The child benefit rate for 2021-22 is currently £1,828 for a parent with two children. If this parent were to earn £52,000, then the child benefit would be eroded by £365.
As with the personal allowance for high-income earners, the classic methods of preserving the full child benefit would be to either make gross gift payments and/or personal pension contributions so that both individuals in the couple see their respective taxable incomes fall below the £50,000 threshold.
At Page Kirk, we have numerous specialists in both taxation and accountancy to help maximise the value of your money as well as ensuring you stay as tax efficient as possible. We work in tandem with our sister company, Page Kirk Financial Services, to ensure all your tax efficiency planning strategies are fully utilised with our experienced in-house wealth planners.
For more information, please call 0115 955 5500 or email enquiries@pagekirk.co.uk.