It’s just a few weeks until 5th April, that spring day which represents the last chance to use your tax allowances for the current financial year.
You’ve probably already taken advantage of many of your allowances by maximising your pension and ISA contributions, and by using Inheritance and Capital Gains Tax exemptions. However, before the tax year ends, here are three more things you might want to do to get the most from the available tax breaks.
Make your family’s pension and ISA contributions
While you may have made your own pension and ISA contributions in the 2020/21 tax year, don’t forget you can also pay into pensions and ISAs for children and grandchildren.
If your child or grandchild is under the age of 18, you can pay up to £2,880 into a pension for them this tax year. Even though a child won’t typically pay tax, you’ll still benefit from £720 in tax relief; the child’s pension fund will then benefit from a total contribution of £3,600.
If you have adult children or grandchildren, you can also make pension contributions on their behalf. Any contribution you make to their pension is treated as if it was made by them. So, if they are a basic-rate taxpayer and you pay £800 into their pension, they will get tax relief taking the total contribution to £1,000.
If your child or grandchild is a higher-rate taxpayer, they can claim higher-rate relief on the contribution you make through their annual tax return.
If your child or grandchild earns between £50,000 and £60,000 and is affected by the high-income Child Benefit charge then your pension contributions will also help them in this regard. Any money you contribute to their pension will be deducted from their income before the charge is calculated, thereby potentially reducing their tax charge.
As well as making pension contributions for family, you can also maximise their contributions to ISAs.
Firstly, it is sensible for you and your spouse to take advantage of you own personal ISA allowance. That way, you can save (Cash ISAs) or invest (Investment ISAs) up to £40,000 as a couple in 2020/21.
Following this, your children and grandchildren also have their own personal ISA allowance. Before 6th April 2021 you can pay up to £9,000 into a Junior ISA for a child under the age of 18. Further, if your son, daughter, or grandchild is aged 16 or 17, you can also contribute to an adult ISA in their name, meaning you can save/invest up to a total of £29,000 in the child’s name, tax-free, before the tax year end.
Don’t forget that you can’t carry forward any unused ISA allowance. As the saying goes, “use it or lose it”.
Make your gifts from income
There are a range of small Inheritance Tax allowances that you should make the most of. These include the annual £3,000 exemption and the “small gift” exemption, which lets you make unlimited gifts of up to £250. These gifts fall immediately outside your estate.
However, one of the most valuable Inheritance Tax exemptions for high earners is the exemption for “gifts from normal income”. For this to correctly apply:
- You must make your gift from income
- The gift must be part of your normal expenditure
- The gift should leave you with sufficient income to maintain your standard of living.
Two ways you might use this exemption are:
- Payment of pension contributions for family members
- Placing an insurance bond into a discretionary trust and then using the exemption to make further (exempt) gifts into trust, in order that the trustees may increment the bond. Rather than chargeable lifetime transfers (CLTs), you would make exempt gifts into a discretionary trust.
One of the key requirements of making gifts from income is that they are regular, both in terms of frequency and value. This means that you should ensure you make your gifts from income each tax year. If you don’t, HMRC may decide that your gifts do not satisfy the requirements of this exemption.
Your adviser can help you to record these gifts carefully. This will be invaluable when it comes to providing evidence to HMRC that the gifts were regular, from normal expenditure and that they did not adversely affect your standard of living.
To include dividends in your personal self-assessment for the 2020/21 tax year, they should be issued and paid by 5 April 2021.
As an example, a company director with a salary of £9,500 (set at the 2020/21 National Insurance primary threshold), you can take up to £3,000 in tax-free dividends by using your remaining (i.e. unused) Personal Tax Allowance of £3,000. This is calculated as £12,500 (the current personal allowance) less the £9,500 salary.
You can then take a further £2,000 in dividends tax-free using your tax-free Dividend Allowance.
It is then possible to draw a further £35,500 in dividends which are taxed at the basic dividend rate of 7.5%. This means that, in the 2020/21 tax year, you could take £9,500 as salary and £40,500 as dividends without paying any higher-rate tax.
Any dividends drawn above this would be taxed at 32.5% (up to £150,000) and then at 38.1% above £150,000. Please note that if you have other sources of income or benefits in kind (such as rental income, external dividends, a company car, or other employment or sole trader income) this will mean more tax will be due, as you’ll use the basic- and higher-rate thresholds sooner.
As always, your HFMC Wealth Financial Planner will be happy to discuss these and other planning initiatives with you.