Tax Planning Before the Year End – Part 1

10th February 2021

The end of the 2020/21 tax year is less than two months away and now may be the opportune time to consider what steps can be taken to reduce your tax exposure for the year.

We will posting various options to help facilitate this, starting with Income Tax Planning.

If any of the below are of interest to you, please feel free to contact us.

Income Tax Planning

Pension Contributions

The gross value of any pension contributions made will extend an individual’s basic rate tax band. These contributions also reduce an individual’s assessable income for assessing child benefit repayable and the total personal allowance that is tapered away (the latter only affects taxpayers with income over £100,000).

For example suppose an individual who is a higher rate taxpayer makes a personal pension payment of £8,000 net. This is grossed up to £10,000, which means their basic rate tax band increases by £10,000, this can result in an income tax saving of £2,000.

The rules surrounding the annual amount an individual may put into their pension is complex and we would urge advice is sought beforehand so that no unexpected tax charges arise.

Gift Aid Payments

Like pension contributions, the grossed up value of these payments work in the same way in extending an individual’s basic rate tax band and reducing assessable income in a tax year.

Before making these payments, you need to ensure your tax bill for the year is sufficient to meet the gift aid reclaim made by the charity. Otherwise you the donor will be obliged to pay for the excess tax reclaimed by the charity.

Investments in Enterprise Investments Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT)

These specifically designed investments can lead to significant income tax savings, which are as follows:

  • For qualifying EIS investments, 30% of the amount invested (up to a cap of £1m per year) will be eligible for income tax relief. So if you made an EIS investment of £50,000, your tax bill can be reduced by up to £15,000.
  • For qualifying SEIS investments, the tax relief available on qualifying subscriptions is 50% of the investment (subject to an annual cap of £100,000).
  • For qualifying VCT investments, income tax relief of 30% is available (subject to an annual cap of £200,000).

These investments are subject to many conditions and if these are breached the tax relief awarded may be clawed back at a later date. We would recommend tax advice is obtained before making any such investment

Independent financial advice would also need to be sought before making any investment.

It is also worth noting that these investments can be carried back to prior tax years. Also the EIS and SEIS investments can also result in capital gains tax relief (see below).

Subscriptions into an ISA

Investment income received from an ISA is free of tax. Up to £20,000 may be invested into an ISA in 2020/21, this may be split in any way between cash and stocks and share ISA’s.

Note, also gains made on disposals made in an ISA are not subject to Capital Gains tax.

Coming up next…Capital Gains Tax and Inheritance Tax Planning.

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