Mark Pattenden reminds Britons to consider key tax allowances, pension payments and charitable giving.
Spring is often a good time to take stock of your finances, and with the tax year-end approaching, there are some simple steps you can take before 5 April to ensure that your affairs are structured in the most efficient way.
With 19% of people who filed a tax return in 2017-18 thinking they may have lost out financially owing to an error, there is a certainly an incentive to get things right.
A good starting point is ensuring that you are familiar with your key tax allowances and how to best maximise these.
For the 2019-20 tax year, every individual earning under £100,000 has a tax-free personal allowance of £12,500. Those earning more than £100,000 will see a restriction on their personal allowance that means for every £2 of income over £100,000, the personal allowance is reduced by £1, while those earning more than £125,000 do not qualify at all.
As the personal allowance is based on adjusted net income, which is the total taxable income before personal allowances, but after certain deductions, there are ways to retain the benefit for higher earners. A charitable donation under the Gift Aid rules can reduce adjusted net income, helping you to keep the personal allowance. Alternatively, there may be scope to make a personal pension contribution, which can also reduce the loss of personal allowance.
Allowances can’t normally be transferred between spouses, although if you are married or in a civil partnership, you may be able to transfer £1,250 of your personal allowance to your spouse if neither of you is a higher-rate taxpayer and one of you hasn’t fully used their personal allowance.
Tax-efficient family finances
Another good way to ensure that you are fully utilising allowances is to distribute income between spouses so that personal allowance, savings allowance and dividend allowance are used in full. Looking at household income in the round like this can also lessen the impact of higher rates of tax. For example, transferring £1,000 savings income from a higher-rate taxpayer who has used their savings allowance in full, to a basic rate spouse with no other savings income, could save up to £400 per year.
On the subject of savings, Isas are free of income tax and capital gains tax (CGT), so they are a popular investment, but one that must be used by 5 April to take advantage of the limits for the current tax year. It’s important that all family members maximise this entitlement each year, as Isa investment limits cannot be carried into future tax years. However, it’s worth being wary about gifting to your children to use their savings allowance or Isa allowance – if they are under 18, in certain circumstances the interest may still be taxable on you as their parent, rather than them.
Finally, if you are selling an asset before 5 April, but you have already used your annual CGT exemption (£12,500), consider transferring it to your spouse to sell, in order to use their exemption. This is especially efficient if the spouse is on a lower rate of tax.
Getting pension payments right
Each tax year, you can contribute an annual allowance of up to £40,000 into a pension and still get tax relief, although this can be lower if you’ve flexibly accessed a pension pot, or have a high income. It is important to keep track of your contributions as if you exceed your annual allowance, there may be an ‘clawback’ charge.
It is possible to claim any unused annual allowance from the three previous years, so double-check that you are up to date before 5 April, as there could be scope to make additional pension contributions without a charge in this tax year.
Under current rules, a donation to charity under the Gift Aid scheme means that the charity can claim back 20% basic rate tax on the donation – for every £1 given, the government adds a 25p top up. Tax relief against 2019-20 income is also possible for charitable donations made between 6 April 2020 and 31 January 2021, providing payment is made before the 2019-20 tax return is filed.
On top of this, higher and additional rate taxpayers can reclaim the difference between the higher or additional rate paid, and basic rate on the donation. Many donors entitled to this refund currently fail to claim it, so if you are eligible, make sure you consider this.
With the end of the current tax year almost upon us, now is a good time to review the full spectrum of allowances and products available to help save as much tax as possible. Be sure to seek advice, and avoid being among those who have made errors.
Mark Pattenden is a partner at haysmacintyre.