Tax year end planning
With the end of the 2021/22 tax year on April 5, 2022 fast approaching, this article outlines some of the financialplanning opportunities available to you over the next three months.
ISA INVESTMENTS
Every individual over 16 can allocate up to £20,000 per tax year in an ISA, although 16-17-year-olds can only invest in a cash ISA. ISAs enable individuals to build up a savings pot where income and capital gains are tax-free. This is available to be drawn at any time or used in retirement as a tax-efficient supplement to pensions.
Investors with a longer time horizon typically look for higher returns available from stocks and shares ISA, rather than cash ISAs, but need to be aware of the higher risks involved than cash. However, despite the ‘stocks and shares’ name, a wide range of investments are available covering different asset classes and levels of risk. Junior ISAs are available for under-18s, for up to £9,000 per tax year and provide a chance for parents/grandparents to build up tax-free savings for the next generation.
A lifetime ISA can be opened by anyone aged between 18 and 39 for saving up to £4,000 per tax year towards a first home or retirement. The Government adds a bonus of up to £1,000 per year but, if used for your first home, the purchase price must be below £450,000.
RETIREMENT PLANNING
UK taxpayers are generally entitled to tax relief on pension contributions of the lower of 100 per cent of earnings or their available annual allowance. For high earners with an “adjusted income” in excess of £312,000 pa, the annual allowance of £40,000 may be tapered down to just £4,000. Unused allowances from the previous three tax years can be carried forward to maximise pension funding. Pensions provide tax relief of up to 45 per cent on contributions, taxfree growth, planning opportunities to draw tax-efficiently in retirement and fall outside your estate for inheritance tax. However, the regulations can be very complicated (eg larger pensions exceeding the lifetime allowance, currently £1,073,100, are subject to additional tax) so always seek financial advice.
CAPITAL GAINS EXEMPTION
Capital gains tax (CGT) is payable on total capital gains made each tax year which exceed the £12,300 exemption. The CGT rate for investments is 10 per cent for basic rate and 20 per cent for higher-rate taxpayers. Using this exemption each year can save tax of up to £4,920 for a couple liable to higherrate tax. Investments realised in this way can also fund ISA investments.
INHERITANCE TAX PLANNING
You are permitted to gift up to £3,000 pa without incurring inheritance tax. You can carry forward any unused exemption from the previous tax year, so a couple who have not made gifts in the previous tax year could gift up to £12,000. Gifts out of surplus income are also exempt from inheritance tax and this should be regularly reviewed.
CHARITABLE DONATIONS
Charitable donations receive a Gift Aid uplift from HMRC of 25 per cent, with additional relief available for higher rate taxpayers. Donations can be carried back to the previous tax year.
PERSONAL ALLOWANCE
Individuals with an annual income between £100,000 and £125,150 incur an effective tax charge of 60 per cent on income earned between these two levels due to losing one’s tax-free personal allowance. However, pension contributions and charitable donations can reduce one’s income and reclaim your personal allowance.
VCT AND EIS INVESTMENTS
Legislation provides tax incentives to encourage investors to allocate funds to smaller UK businesses through venture capital trusts (VCTs) and enterprise investment schemes (EIS). Benefits include income tax relief of 30 per cent on the initial investment (up to £200,000 per tax year for VCTs and up to £1 million for EIS) if held for at least five years (VCTs) or three years (EIS) and tax-free dividend income from VCTs. Losses on EISs can be offset against taxable income. However, these are high-risk investments with capital at risk and specific advice must be taken as they are not suitable for everyone. A wide range of investments are available and we carry out detailed in-house due diligence on any recommended investments.
Everyone’s circumstances are different, so seek expert advice’
THE IMPORTANCE OF ADVICE
Financial planning is not a straightforward process and everyone’s circumstances are different, so it is essential to seek professional advice.
Elliot Gothold is a chartered financial planner with NLP Financial Management, 020 7472 5555, elliot.gothold@nlpfm.co.uk. NLPFM offers a discretionary investment management service with a range of portfolios for different risk levels, including an increasingly popular Sustainability portfolio. NLPFM is fully independent and offers holistic financial planning, with no fee for an initial consultation. This article is for information only and should not be construed as a personal recommendation of any investment or service. NLP Financial Management Ltd is authorised and regulated by the FCA