End Of Tax Year Planning
The end of the tax year, falling on 5 April 2020, is almost upon us again. Whilst there are still only a couple of weeks left, there may still be time for some planning to keep your tax bills down. Consider the following if you want to avoid paying more tax than you need to.
Because the government considers saving for retirement something to be encouraged, making contributions to a pension scheme attracts tax relief. Relief at the basic rate of tax will usually be claimed by your pension provider. If you pay tax at higher rates then including pension contributions on your tax return will get you additional relief.
For most people, the maximum amount that you can get tax relief on in any tax year is £40,000. This limit applies to the total amount paid into all pensions, not each pension pot you have. If you fail to use all of this allowance, then it can be carried forward, but only for a maximum of three years. Ensuring you make contributions before the end of each tax year eliminates the risk of this allowance being lost. If you are a high earner (over £150,000) or have already started drawing a pension then the allowance is reduced. You should seek professional advice if this applies to you.
Pension contributions are also deducted for calculating Adjusted Net Income. This is the figure used for certain calculations, such as whether an individual needs to start paying back Child Benefit received (applicable when Adjusted Net Income is above £50,000). When your income is just over this limit, pension contributions can eliminate this additional charge.
Donate to charity
When you donate to charities under Gift Aid, they are able to claim tax back from HMRC. At the same time, higher earners will get a reduction in their higher rate tax based on how much of that income has been donated to charity.
As for pension contributions, donations to charity are also deducted when calculating Adjusted Net Income.
Asset sales and purchases
For capital gains, every individual receives a tax-free allowance in addition to the personal allowance for income tax. For the current tax year this is £12,000. This allowance cannot be carried forward to future tax years. If you are planning to sell several larger assets in the near future, you should try to arrange to sell them either side of the tax year end. This would ensure that you get the benefit of two years’ worth of the allowance instead of one.
If you run a self-employed business, then you might want to consider buying assets instead. Whilst large pieces of equipment will be used in the business for years to come, it is possible to claim the full cost immediately for tax purposes. This claim is called the Annual Investment Allowance, and currently covers purchases up to £1,000,000 (more than sufficient for the majority of businesses). The decision to invest in equipment should not solely be based on this relief. However, if you were planning to buy equipment soon anyway, doing it before the end of the tax year ensures you get relief for this expense as early as possible.
The most common tax-efficient investment is the Individual Savings Account (ISA). These accounts are exempt from tax and can therefore prove a tax-efficient way of saving. At present you can invest a maximum of £20,000 in an ISA in each tax year. If you have not yet made full use of the current year’s ISA allowance and have funds to spare, now is the time to invest.
There are a number of other government schemes available which give tax relief. These are mainly aimed at encouraging individuals to invest in new businesses and include such arrangements as the Enterprise Investment Scheme and Venture Capital Trusts. There are strict conditions that must be met for these schemes and professional advice should be sought by anyone considering investing in one.
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