The end of the tax year is just a few weeks away and, with it, your clients’ last chance to use some of the valuable tax breaks that are available.
Making the most of these five tax allowances and exemptions before 5 April can boost your clients’ wealth and help them to minimise their tax liability.
1. Maximise annual pension contributions
In the 2020/21 tax year the pension Annual Allowance is £40,000. Clients can pay up to this amount into their pension (or 100% of their earnings if this is lower) and benefit from generous tax relief.
Individuals with an income over £240,000, or who have already begun flexibly accessing their pension fund, may be subject to a lower Annual Allowance. Speak to us for assistance.
A £1,000 contribution to a pension costs just £800 thanks to basic-rate tax relief. If your client is a higher or additional-rate taxpayer, they can claim further relief through their self-assessment tax return.
The tax relief on offer makes pensions one of the most tax-efficient ways to save for the future. So, it’s important that clients maximise their contributions. Any unused Annual Allowance can be carried forward for three years, so 5 April is the last opportunity to use the allowance from 2017/18.
Remember that even non-taxpayers (people who aren’t working, or even children) still benefit from 20% tax relief on pension contributions. So, your clients can pay up to £2,880 into a pension for a spouse, partner or child and the tax relief means this will be topped up to £3,600.
2. Take dividends
If your client is a company director, or holds shares in a dividend paying company, they can take up to £2,000 in dividends in 2020/21 without incurring tax.
The dividend allowance is per individual, so it makes sense for clients to use this tax-free allowance if they can before 5 April. Any dividends above £2,000 will be taxed dependent on a client’s Income Tax band:
- Basic rate: 7.5%
- Higher rate: 32.5%
- Additional rate: 38.1%
Clients can’t carry forward any unused Dividend Allowance, so if they don’t use it before 5 April, they will lose it.
3. Maximise ISA contributions
In the 2020/21 tax year, clients can pay up to £20,000 into an ISA. This could be a:
- Cash ISA – similar to a savings account, but with tax-free interest
- Stocks and Shares ISA – allows clients to invest in shares and other assets. Returns are free of tax
- Lifetime ISA – available to clients aged between 18 and 39, clients can benefit from a 25% government bonus on contributions, as long as any money they withdraw before the age of 60 is specifically used to fund the purchase of their first home.
Clients can split their investment across various types of ISA provided they don’t contribute more than £20,000 in the 2020/21 tax year. Note that the maximum annual contribution to a Lifetime ISA is £4,000.
In addition to the adult ISA allowance, parents and grandparents can contribute up to £9,000 in the 2020/21 tax year to a Junior ISA (JISA) for a child under the age of 18. Like their adult counterparts, interest and returns are tax-free.
A client can’t carry forward any unused ISA allowance, so they must make contributions before 5 April.
4. Crystallise gains and use the Capital Gains Tax allowance
Clients pay Capital Gains Tax (CGT) when they sell assets such as a second property or shares held outside an ISA, and make a profit.
However, in the 2020/21 tax year, clients can realise up to £12,300 in gains without paying any CGT. So, it can pay to crystallise some gains – perhaps spreading out the disposal of assets across several tax years – to make use of this allowance and reduce a potential CGT liability.
If clients exceed this allowance, their rate of CGT will depend on their other taxable income:
- Standard CGT rate: 18% on residential property, 10% on other assets
- Higher CGT rate: 28% on residential property, 20% on other assets
Again, clients can’t carry forward an unused CGT allowance, so it does pay to make the most of it before 5 April.
5. Make gifts
If your client has a valuable estate and a potential Inheritance Tax (IHT) liability, they should make the most of the various gifting exemptions that are available.
In the 2020/21 tax year, clients can make a gift of up to £3,000 and this will immediately fall outside their estate for IHT purposes. It’s an individual allowance, so couples could gift up to £6,000.
Additionally, any unused exemption can be carried forward one year. So, if a client didn’t use their 2019/20 exemption, they could gift up to £6,000 before 5 April 2021 (£12,000 as a couple) and this sum would immediately fall outside their estate.
Clients can also make unlimited small gifts up to the value of £250 (as long as they are not to the same person who received the £3,000 gift).
Where clients have sufficient surplus income, they can also make gifts from this income. These gifts should be made regularly and must:
- Be made from a client’s income
- Be part of their normal expenditure
- Leave them with sufficient income to maintain their current lifestyle.
This can be a useful way to offer financial support to loved ones, for example, paying the school fees of grandchildren or making regular deposits to pay for the living costs of children. Clients should keep careful records of gifts made under this exemption.
Get in touch
Making the most of the tax allowances and exemptions available can help clients to maximise their wealth and pay less tax. If you have clients who would benefit from financial advice in this regard, we’d be delighted to help them.
To find out how we can work with you, please email firstname.lastname@example.org or call 01904 655330.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.