April 5, the end of the financial year is fast approaching, and if you’re to take advantage of the financial planning opportunities this annual deadline brings, now’s the time to consider taking action.
Although people should be looking to utilise the many allowances, reliefs and exemptions that are available to them throughout the financial year, in many cases for perfectly understandable reasons this may not happen. Circumstances change and a person’s (and indeed their family’s) finances may not be the same as they imagined they’d be earlier in the year.
Why is the end of the tax year so important from a financial planning perspective?
Put simply, the end of the tax year represents the last opportunity for people to make use of many of the allowances, reliefs and exemptions to legitimately reduce their personal tax and give a welcome boost to their finances, and those of their family. However, what certainly tends to concentrate the mind as the April 5 deadline approaches is that in many cases, the ‘use it or lose it’ principle applies.
Take the £20,000 annual ISA (Individual Saving Account) allowance. If for whatever reason you only contribute £12,000 in the tax year ending 5 April 2022, because you cannot carry forward the unused allowance into the following tax year, you effectively lose the opportunity to invest or save £8,000 tax free. Many, though not all allowances and tax reliefs work like this.
The same ‘use it or lose it’ principle applies to contributions you make to a child’s Junior ISA, where the current annual allowance is £9,000 per child. If you are over 18 and under 40, it may be worthwhile opening a Lifetime ISA (LISA), or adding to an existing LISA up to a maximum of £4,000 before the end of the tax year, with anything you save receiving a 25% top up from the government. However, please note that this will count towards your overall £20,000 ISA Allowance.
As the end of the tax year draws closer people may find themselves approaching their £20,000 annual ISA Allowance limit. If that is the case, an easy way for the household finances to benefit, is for their spouse or partner to open their own ISA, which has the effect of immediately doubling the allowance available to £40,000.
Capital Gains Tax
If you’re sitting on a capital gain on assets, such as shares or funds (held outside of a tax wrapper), it could make sense to sell some by the end of the tax year in order to make use of the capital gains tax (CGT) annual exemption of £12,300.
If they haven’t already done so, a couple may also be able to reduce their capital gains tax bill if the person paying income tax at the higher rate of the two transfers assets, such as shares to their spouse or partner. If the latter then sells the shares, they’ll pay capital gains tax at a lower rate than their partner would have.
The annual pension allowance, which is the amount of tax-relievable contributions an individual can personally makes towards their pension or pensions is 100% of earned income up to a limit of £40,000, or £3,600 gross, whichever is greater.
As we approach the end of the tax year, if you have the opportunity to save more into your pension, you’ll automatically benefit from 20% tax relief, basically free money from the government. In addition, higher rate or additional rate tax payers can claim extra tax relief.
Under the carry forward rules, you’re allowed to make use of any annual allowance not used during the last three tax years. These rules only apply if you were a member of a UK-registered pension scheme during that time period.
Even if you have no earnings, consider opening a SIPP (Self-Invested Pension Plan). This enables you to claim basic-rate tax relief on up to £2,880 in the current tax year, boosting your pension pot by an additional £720.
Taking a large amount of your pension in one tax year could land you with a significant tax bill. If this is the case, it could be beneficial to make some withdrawals before the end of the financial year. Please speak to your Courtiers Adviser for further information.
When adding to your pension contributions, it’s important to keep an eye on the lifetime allowance of £1,073,100; unless you meet the conditions for what is known as protection, exceeding this figure could land you with an unexpected tax bill. This is a complicated area, so please contact your Courtiers Adviser if you would like any further details.
Anyone who has flexibly drawn money from a money purchase or Defined Contribution (DC) pension, also needs to be aware of the MPAA (Money Purchase Annual Allowance), a subject we covered last year.
If you haven’t used up your Annual £3,000 gifting allowance, now is the time to do so. Although you can carry this allowance forward for one year, it is lost if not then used. The £250 small gifts exemption cannot be carried forward. If a child or a grandchild is getting married before the start of the next tax year you may wish to take advantage of the respective gifting allowances of £5,000 as a parent or £2,500 as a grandparent.
In general, it’s a good idea to gift to your family earlier rather than later in life, as this offers the best chance of benefiting from the seven-year rule, whereby any gifts above the various allowance and exemptions fall outside a person’s estate as long as they live for seven years.
Check if you qualify for the Marriage Allowance (aka the Marriage Tax Allowance)
In certain circumstances, a person is allowed to transfer their personal tax allowance to their spouse or civil partner. This allowance only applies if one person is not paying income tax, while their spouse or civil partner must be a basic rate taxpayer. The former must apply to HMRC to request any unused personal allowance be transferred to their spouse or civil partner. The partner who earns more, will then have up to £1,260 added to their personal allowance, reducing their income tax by up to £252.
If you are a higher rate taxpayer, you may wish to top up your contributions to Gift Aid. Payments made through gift aid not only benefit charities, but you can claim back the difference between the rate of tax you pay and the basic rate on your donation. This must be done via your tax return. A person can make gift aid payments of up to four times their total income or capital gains tax paid for that tax year.
Use it or lose it, with the clock ticking towards the 5th of April, there’s still time to take advantage of the financial planning opportunities for this tax year.