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Beyond the balance sheet

End of tax year planning strategies for 2021/22

Tom Biggs 11/3/2022 18 minute read

Tom Biggs ACA CTA, highlights the different considerations and strategies that need to be reviewed for effective end of year tax planning.

The approaching end of tax year can be an opportune time to focus the mind in terms of reviewing your personal, and business, financial affairs. It's wise to set some time aside for this, so that you understand what opportunities, if any, may be available to you and your family in terms of making use of available allowances, and reliefs.

Needless to say, the UK tax system in enormous and extremely complicated. If it's not your area of specialism then we'd recommend talking to a tax advisor. They can help you avoid the common pitfalls, explore any opportunities, and maximise potential savings, where possible. 

Whilst tax advice is very much geared to your personal circumstances, in this post we list the various areas you should consider carefully and discuss with your accountant. It might just save you some money!

Get in touch for an end of year review to optimise your tax profile >

When does the tax year end?

In the UK, the tax year begins on 6 April and ends on 5 April of the following year. It doesn't follow the calendar year due to historical, religious, and agricultural reasons owing to the Spring Equinox and the shift from the Julian calendar to the current Gregorian version.

 

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1. Year end tax planning checklist for individuals

Income tax and avoiding the 60% effective rate

The tax-free personal allowance for the 2021/22 tax year is £12,570 and will remain frozen at this level until 5 April 2026.

The allowance is reduced by £1 for every £2 that your income exceeds £100,000. Consequently if your income is in excess of £125,140 you don't have a personal allowance. It also means the effective rate of tax on income in the £100,000 - £125,140 range is 60%.

Tax band Income tax rate 2021/22 Income tax rate 2022/23

Basic-rate

(income of £12,570 - £50,270)

20% 20%

Higher-rate

(£50,271 - 150,000)

40% 40%

Additional-rate

(> £150,000)

45% 45%

You can avoid this issue potentially through pension contributions and gift aid. The government encourage saving for retirement through tax relief on pension contributions. This means you can use these contributions and donations to plan and potentially ensure your income doesn't breach £100,000 and incur the 60% effective rate of tax. 

Where applicable you should also consider the potential transfer of 10% of the personal allowance between spouses or civil partners if one has income below the personal allowance and the other is a taxpayer.

Retaining tax free childcare

Similar to the income tax point, eligibility for tax free childcare is lost when one parent’s income is above £100,000. Pension contributions and gift aid donations are however, deductible in calculating the £100,000 income figure. Therefore additional gift aid and pension contributions may result in tax free childcare being retained.

Tax free childcare is worth up to £2,000 per year so this is definitely something to consider if you are close to the £100,000 threshold.

Dividends and timing

Every tax year, you can take £2,000 worth of dividends from your business, at a tax rate of 0%. If you don't make use of it then unfortunately that £2,000 allowance can't be carried over to the next tax year. It therefore makes sense to use it, if you're able to do so.

Above £2,000, the dividend tax rates are as follows:

Tax band Dividend tax rate 2021/22 Dividend tax rate 2022/23

Basic-rate

(income of £12,570 - £50,270)

7.5% 8.75%

Higher-rate

(£50,271 - 150,000)

32.5% 33.75%

Additional-rate

(> £150,000)

38.1% 39.35%

Be sure to generate sufficient income from dividends to make use of the allowance and basic-rate. Also, you may need to look at the timing of the distribution of dividends to achieve this.

Of note, the dividend rates are set to increase from 6 April 2022 in line with the Government's announcement of the Health and Social Care levy, which will add an additional 1.25% to the dividend rates of tax. It may therefore be worth considering bringing forward dividends where possible to avoid the higher rates of dividend tax.

Be sure to budget for the additional tax liability that you'll incur through the balancing payment due by 31 January 2024, in addition to the payments on account for 2023/24.

Capital Gains Tax, use of allowances and possible increases

If you've sold a capital asset, or assets, for profit then you benefit from an allowance of £12,300. After this the Capital Gains Tax (CGT) rate you're charged depends on the asset you've sold and your tax band. You're allowance can't be carried forward meaning it makes sense to make use of it for your gains every year.

Tax band CGT on residential property CGT on other assets

Basic-rate

18% 10%

Higher-rate / Additional-rate

28% 20%

There has been much speculation about CGT in recent years regarding whether the government will get rid of, or reduce, certain exemptions as well as the possibility of increasing CGT rates to align with income tax rates. Whilst it is impossible to accurately predict the future, be sure to consider your assets and investments carefully every year with a view to ascertaining if actions and disposals today, would work best for you by making use of existing tax rates, and reliefs.

Where you've sold a residential property, remember that the gains must be reported and paid to HMRC within 30 days of the sale prior to 26 October 2021. After that date, you must do so within 60 days. 

If you own more than 1 home, you may need to consider electing one of them as a principal private residence (PPR). Any gains on the sale of your PPR are usually exempt from CGT. Remember, you have 2 years in which to make an election.

If you are separating, or are in the process of divorce, then think carefully about the transfer of assets in the current tax year. The rule is assets can only pass between separated spouses and not be subject to CGT in the year of permanent separation. Any transfers after this could result in a CGT liability, so it makes sense to consider carefully when exactly you separate for tax purposes.

If you have sold a business, then Business Asset Disposal Relief (BADR) may apply. Where this is the case, CGT is charged at 10% on the gains subject to a lifetime limit of £1m. BADR applies to the sale of a business trading as either a:

  • Sole trader or;
  • Partnership or;
  • Limited company
If you own a business then you should review your BADR position regularly, the rules are sophisticated and it is easy to deviate from them.

Inheritance Tax and gifting within exemptions

UK Inheritance Tax (IHT) is subtle and sophisticated, containing various rules, and reliefs, that impact how much of your estate you hand over to the taxman. Common exemptions to potentially make use of include:

  • A tax free allowance, known as the nil-rate band (NRB) of £325,000 (effectively renewable every 7 years whilst the donor is still alive)
  • A gifting annual exemption up to £3,000, which if unused in a tax year can be carried forward and used in the following year
  • Small gifts that can be given to as many people as you want in a tax year with a worth up to £250 each
  • Wedding gifts up to £5,000 for your child, £2,500 for a grandchild, and £1,000 for anyone else


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Given the above, it would be wise to structure your affairs to make use of these reliefs and allowances. Ask yourself:

  • What can you pass on to future generations?
  • Is your will up to date to reflect this?
  • Will the assets that you retain in retirement provide you with sufficient income?

Property Investments and the calculation of taxable income

If you have a buy-to-let property and you're a higher, or additional rate, taxpayer then you'll only be able to claim relief on the interest at the basic rate. This rule came into effect from 6 April 2020. It means your property income will no longer be reduced by any mortgage interest you pay.

You need to review this carefully because the implication is your taxable income could then exceed thresholds that could reduce your personal allowance and give rise to a greater tax liability. 

Make use of Individual Savings Accounts (ISAs)

You have an allowance to invest up to £20,000 in an Individual Savings Account (ISA) in any given tax year. If you don't use the allowance in that year then it is lost. There are different types of ISA for you to consider for your individual circumstances and what you're trying to achieve. These include:

  • Cash ISA
  • Stocks and shares ISA
  • Help to buy ISA
  • Inheritance ISA
  • Lifetime ISA
  • Flexible ISA
  • Innovative finance ISA

Income and capital gains generated within an ISA are exempt from income tax and CGT. Making use of an ISA as a savings tool is therefore valuable for tax planning purposes, especially where pensions savings allowances have been maximised.

It is important to consider the investment implications of saving into various types of ISAs. We recommended you seek advice from an Independent Financial Advisor prior to making any investments.

Investment in the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

If you purchase shares in a business that qualifies as an EIS investment, then your tax liability can be reduced, for either the year of investment or the prior year under a carry back claim, by up to 30% of the amount you invested. If you have capital gains from other disposals in the last 36 months, or following 12 months, these can be re-invested in EIS shares resulting in the availability of CGT deferral relief. This defers the CGT until the new investments are subsequently disposed of.

Investment in SEIS provides income tax relief of up to 50% of the amount you invested in either that tax year of investment, or the previous tax year under a carry back claim.

Any gain under EIS or SEIS is usually CGT free if the investment is held for at least 3 years. If your shares are sold at a loss, you can set that loss against income tax for that year, or the previous year.

Investment in Venture Capital Trusts

Venture Capital Trusts (VCTs) are specialist investments that offer tax breaks so that you can put money in small, high risk organisations and securities. Investment in VCTs offers:

  • Income tax relief at 30% of the amount invested so long as the investment is held for a minimum of 5 years
  • VCT shares are CGT exempt, assuming they rise in value
  • Dividends on VCT shares are tax-free

Of note, gains from other assets can't be rolled into purchasing VCT shares.

Pension savings

You have a lifetime allowance, on the total amount you can hold for all your pension funds, of £1,073,100. Since 6 April 2014, there has been an annual allowance for pension contributions which currently stands at £40,000. The total for personal and employer contributions reduces by £1 for every £2 of an individual’s ‘adjusted income’ over £240,000 and can impact if your ‘threshold income’ from all sources is over £200,000.

Of note, if you have unused allowances from 2018/19, 2019/20, and/or 2020/21 then these can be brought forward and used in 2021/22. Breaching the rules by paying in too much results in an annual allowance charge, at your marginal rate of tax.

After the the age of 55, you can access you entire pension pot. This is for you to do with it as you please. Be careful as withdrawals have tax implications and could result in you moving into a higher tax band.

2. Year end tax planning checklist for businesses

From April 2023, Corporation Tax is set to rise. The main rate will increase to 25%, from 19%. Businesses with taxable profits less than £50,000 will be taxed at the current 19%. If your profits are between £50,000 and £250,000 then a tapered rate will be applied. If your company is accounting for deferred tax, you may need to factor in the increased rate in your deferred tax calculations for your year-end accounts.

 

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Given these changes and the various short term and existing measures to help businesses, it would be wise to think about when you invest in capital assets and how much expenditure is needed. There is, of course, a fine balance between tax planning and the genuine business case for investment.

Should you claim valuable reliefs and recover tax through losses now? Alternatively, you could defer the use of losses to 2023 when the higher rates are introduced, thereby potentially saving later. The tax strategy you pursue should be dictated by your business circumstances and priorities.

Extended loss carry back

The new rules announced in the Budget 2021 mean trading losses can be carried back for 3 years instead of just 1, subject to a maximum of £2m per year. However, this isn't a permanent change, meaning it only applies to losses for accounting periods ending between 1 April 2020 and 31 March 2022. The losses are offset against your profits in the most recent years first, and then they are carried back to earlier years.

Tax efficiency through the Annual Investment Allowance

If you have money you can invest in your business then this can reduce your tax liability by making use of the Annual Investment Allowance (AIA). The AIA ensures up to £1m of investment can be deducted in the year of expenditure from your profits before Corporation Tax is applied, when invested in qualifying assets.

You'll need to act on this however, as the allowance was only temporarily increased and will return to a level of £200,000 from 1 April 2023. Similar to the super deduction, detailed below, to benefit from these reliefs requires you to time your expenditure and investment.

The Super Deduction

The Super Deduction is a temporary measure designed to encourage company investment. If you have invested in qualifying plant and machinery since 1 April 2021 then you could benefit from a 130% write off against your taxable profits for that expenditure up to 31 March 2023.

 

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This then leads to important questions regarding your likely future profitability and if it's worth bringing forward investment plans given the upcoming increase in taxation on company profits. To qualify, expenditure must be in new investments, not second hand.

Of note, the super deduction is only available to companies subject to Corporation Tax, and therefore will not be available to sole traders or partnerships.

Trivial benefits and the annual function exemption

Think about if you have provided your employees with cash, gifts, and/or benefits that aren't included in their wages. If you exceed certain limits there could be a tax liability. For tax efficient gifts to staff you need to refer to the trivial benefits rules.

If you have held Summer and/or Christmas parties then you should refer to the rules around the annual function exemption. You must report all this to HMRC by 6 July and pay any tax and NIC due by 22 July.

Managing income

You could look at managing your income whereby some of it falls into the following financial year. This can be useful from a tax perspective. If you can delay the completion of sales of goods or services in, say a bumper year, this can be tax efficient. That's especially the case if projections for the next year aren't as good. 

P60 forms

Finally, remember that the P60 forms, that summarise your employees’ salaries and deductions for the prior tax year, must be issued to staff by 31 May. They have to be distributed to everyone that worked for you on 5 April.

End of tax year planning

The content of this post was created on 07/03/2022 and updated on 11/03/2022.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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