Getting Ready for the New Tax Year

Making the decision to take a healthy and savvy approach to your finances should be something we can all get on board with. We recommend staying informed about the range of tax relief opportunities outlined below to help protect and maximise your savings and investments, as well as optimise financial growth and security.

ISAs

Before 5th April 2021, you can pay a total of £20,000 into your stocks and shares ISA; from 6th April 2021, you can pay in an additional £20,000.

With the opportunity to invest a total of £40,000, this means great potential for tax-efficient gains on any income or capital growth.

You can also look out for the future of your children by sheltering up to £4,368 in a tax-efficient Junior ISA before 5th April 2021.

Pensions

Pension legislation offers great scope for tax relief by allowing up to £40,000
investment in any given year into an approved pension arrangement. This
qualifies the investor for tax relief at their marginal rate, meaning that a 45% taxpayer is currently able to save £40,000 into their pension for a net cost of £22,000.

This year, there may be the opportunity to maximise your contributions into a pension up to £160,000 without having to pay an annual allowance tax charge, providing you have not used any of your previous three years’ allowance.

Tapered Annual Allowance

Since 6 April 2020, those with a taxable income over £240,000 will have their annual allowance for that tax year restricted. This means that for every £2 of income that you make over £240,000, your annual allowance is reduced by £1.

This reduced rate is rounded down to the nearest whole pound. The maximum reduction is £36,000, which means that anyone with an income of £312,000 or more has an annual allowance of just £4000. If you have a high income but are caught by the restriction, it may be advisable to reduce your contributions and/or those of your employer or an annual allowance charge will apply.

However, the tapered reduction doesn’t apply to anyone with ‘threshold income’ of under £200,000, which presents an attractive tax planning opportunity for those earning between £150,000 and £200,000.

Income Tax

With the top rate of Income Tax at 45%, it is essential to use every chance to mitigate this charge. If your earnings are close to this level, making a pension contribution could help to improve your overall tax position and avoid “the personal allowance trap” with an effective tax rate of 60%.

Inheritance Tax

If your joint estate is valued at more than £650,000, or your individual estate at more than £325,000, any excess will be subject to a potential 40% tax liability.

However, there are a number of annual exemptions available which can help to reduce your overall Inheritance Tax (IHT) liability. Consideration should also be given to how Wills and Trusts can be an effective tool to help mitigate your liability.

Capital Gains Tax

The Capital Gains Tax (CGT) annual exemption is currently set at £12,300 and
must be utilised by 5th April 2021. CGT is based on your marginal rate of tax;
if this amount lies within the basic Income Tax band, you will pay 10% on your gains (or 18% on residential property). Otherwise, you’ll pay 20% (or 28% on residential property).

Consideration should be given to potential capital losses that could be offset against current year gains.

Seed Enterprise Investment Scheme (SEIS)*

Invest up to £100,000 with a Seed Enterprise Investment Scheme and generate the following tax benefits:

  • 50% Income Tax relief (a £100,000 investment costs £50,000)
  • Potential to defer the capital gains tax payable on other investments payable on other investments made
  • Inheritance Tax relief after the investment is held for two years
  • Tax-free capital growth
  • Entitlement to loss relief if the investment fails

Enterprise Investment Scheme (EIS)*

Invest up to £1,000,000 with an Enterprise Investment Scheme and generate the following tax benefits:

  • 30% upfront Income Tax relief (a £100,000 investment costs £70,000)
  • Potential to defer the capital gains tax payable on other investments made
  • Inheritance Tax relief after the investment is held for two years
  • Tax-free capital growth
  • Entitlement to loss relief if the investment fails

Venture Capital Trusts

VCTS offer the chance to invest between £5,000 and £200,000 to generate tax relief of 30% on your gross investment. Your investment must be held for at least five years to qualify, while all dividends and capital gains from VCTs are paid with no further tax liability. VCTs are not suitable for every investor and it is vital to consider your attitude to risk, timescales for investing and any other financial planning that might affect your ability to use this investment tax efficiently.

Investments can involve varying degrees of risk and, as such, they are not suitable for everybody and advice should be taken from an authorised firm before investing. You should remember that they can go down as well as up in
value and you may not get back the full amount of your original investment. Past performance should not be taken as a guide to future returns.

How can we help?

If you would like advice on the tax relief opportunities mentioned in this article or need assistance with effective tax and financial planning, please get in touch.

Your financial wellbeing is our priority

We are also offering virtual, one-to-one access to our wealth management team to evaluate the impact that Covid-19 has had on your personal planning and discuss the actions you may wish to consider. This meeting would be free of charge. Please register your interest here.

 

* These investments can be illiquid and ,in some circumstances, it may be difficult to sell them at any price; you could lose some or all of your money.

Disclaimer: The information contained within this communication does not constitute financial advice and is provided for general information purposes only. The communication is based on literature supplied to us, unless other sources are quoted. No warranty, whether express or implied, is given in relation to such information. Simmons Gainsford shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.

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