Tax Efficient Investment Should Be Made Before Tax Year Ends

With a week to go to the end of the tax year, it’s time to get your tax affairs to make sure that you claim what you are allowed and make provisions for the future, say leading tax and advisory firm Blick Rothenberg.

Paul Haywood-Schiefer, a senior manager at the firm, said: ‘Having paid what they owe to the taxman, many people forget that the end of the tax year is when they need to pay attention to getting their affairs for the future and claiming what they are entitled to. If you are a taxpayer, then planning for the future should be an important part of what we all do. There are several things to be remembered and acted upon.’

‘Remember your tax-free allowances – The first £12,570 of income is covered by your Personal Allowance and received tax-free (unless your total income exceeds £100,000). A further £2,000 of dividend income is covered by a Dividend Allowance (if not already covered by the Personal Allowance), and there is no tax to pay. For Basic rates and Higher rates taxpayers, they can also benefit from the Personal Savings Allowance, which means the first £1,000/£500 (respectively) of interest is free from tax. Although you might not be able to do much about influencing when interest or dividends are paid, don’t forget these exist when preparing your tax return.’

‘Utilise the Capital Gains Tax Annual Exempt Amount – In the same way, as you have tax free allowances on the dividends and savings, you can receive 300 capital gains completely tax free. Therefore, you might want to use this to reinvest the gain then. If you don’t have gains, you could think about crystalising a loss. While a tax-free amount of gains is great, you could also consider crystalising capital losses if your portfolio is not performing and you have shareholdings sitting at a loss. i.e., selling stocks at a loss to lock in (crystallise) that loss to carry forward against future gains.’

‘Crystalised capital losses act differently in year losses, which are immediately set against any gains, even though you have a capital gains tax annual exempt amount (even to the point of wasting it). Where a person has losses crystalised from an earlier year, they will only ever reduce your gains to a maximum of the annual exempt amount so as not to waste any of it, even if they exceed this. The unused losses will then be carried forward again to offset future gains.’

Paul continued: ‘There are other ways to get your affairs in order. Use your ISAs. Make full use of the annual limits for contributions to your ISAs. The growth and income within these are completely tax-free; the yearly maximum amount that can be saved in ISAs is £20,000 (though a Lifetime ISA has a maximum of £4,000 allowed, which uses part of your overall ISA allowance) in a combination of ways through both stocks, shares, innovative finance, or cash.’

‘You can make personal pension contributions – The amount you can put in will depend hugely on your income for the year, what that income is and what unused allowances you have from the three prior tax years. As a minimum, a person can make pension contributions up to £3,600 (gross) in the year, and you have an annual allowance of up to £40,000 (if your income allows).’

‘Why making pension contributions is so beneficial from a tax perspective is twofold. The contributions you make to your personal pension fund are considered to be made net of basic rate tax so that the pension fund will claim the excess from the Government. i.e., you contribute £2,000 personally, the pension fund would claim an extra £500 from the Government (2,000 x 100/80 = 2,500). Further, higher and additional rate taxpayers can claim tax relief on the contributions through their tax returns, extending their basic rate tax band and giving relief up to 20%/25% (respectively) on the gross contribution amount.’

‘Making charitable donations under the Gift Aid scheme to worthy causes is beneficial to the charity in question; it can also help reduce your tax bill. As with pension contributions, the tax benefits are the same. This time, however, though they are deemed to be made net of basic rate tax, the charity will claim the extra 20% from the Government. Higher and Additional tax rate payers can also benefit from their Basic Rate tax bands being extended by the gross donation amount mentioned above. Care must be taken about Gift Aid donations to ensure that you have paid sufficient tax to HMRC to have franked the donation; otherwise, you will pay the tax  to the charities claim via your tax return.’

‘Note also that additional personal pension contributions and gift Aid donations will also reduce a person’s “adjusted net income” so there may be a benefit for those individuals whose income is between £100,000 and £125,140 where the Personal Allowance is reduced or for those with income between £50,000 and £60,000 who are subject to the High-Income Child Benefit Tax Charge. Again, in relation to pension contributions, you need to ensure you will not exceed the annual allowance, including any available carried forward amounts.’

Paul continued: ‘If you could think about accelerating dividend payments within your power. As well as using your Dividend Allowance, where possible, and in advance of the introduction of the new Health and Social Care Levy of 1.25% due to apply to dividends from 6 April 2022, make dividend payments now. However, remember to do your sums first as you need to take care regarding moving into a higher tax bracket by doing so, particularly if the amounts will push the individual over £100,000 (i.e., to the point where the personal allowance is reduced).’

‘Another consideration is accelerating employee bonus payments. For employers, where possible, in advance of the introduction of the new Health and Social Care Levy of 1.25% (payable by both the employee and employer), it might be worth accelerating bonuses that might otherwise have been paid shortly after the end of the tax year. Whether the individual receiving it is happy or not might depend on whether that bonus again takes them over thresholds, which means the benefit of the Health and Social Care Levy saving on the accelerated bonus is outweighed by the loss of Personal Allowance or pushed into the High-Income Child Benefit Charge. So be careful.’

‘You can utilise your annual gift allowances for IHT purposes. You have a general allowance of £3,000 of gifts per annum that will not be added back to your estate on death. In addition, you can give as many small gifts as £250 or less, per gift recipient, per annum (you can’t just give one-person endless gifts of £250, it’s one per person), which will also fall out; of your estate.’

‘You can make a tax-efficient investment. Suppose you know you will have a large tax liability for the year. In that case, you might consider investing in an EIS (Enterprise Investment Scheme), VCT (Venture Capital Trust) or SEIS (Seed Enterprise Investment Scheme). Each has its limits, requirements, and other tax reliefs. With SEIS, it is possible to get up to 50% income tax relief on the value of your investment (to a maximum investment of £100,000 pa); you can also use the reinvestment relief here to get 50% of the value of funds reinvested into the SEIS, to exempt capital gains of an equivalent amount. VCT and EIS investments give income tax relief at 30% (subject to maximum investments of £200,000/£2,000,000, respectively). Whilst EIS does not allow a capital gains tax exemption, it does allow for a deferral of capital gains that are reinvested into EIS shares (VCT does not offer this).’

Paul concluded: ‘Though a deferral may seem attractive at first sight, when the EIS shares are sold or if the investment ceases to qualify before the three-year holding period, the gain will crystallise and be taxable at the tax rates day. At present, capital gains tax rates are relatively low, and the Office of Tax Simplification has suggested aligning these with income tax rates, which might mean when the gain crystallised, the deferred tax might be higher than what would be currently payable. For EIS/SEIS/VCT investments, the actual gains on those shares will be exempt, so long as the shares have been held for the requisite holding periods to achieve this.’

‘Investment decisions should never just be made based on tax. Before undertaking any of these, you must consider your overall position, which will be beneficial to you, and which will not.’