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Are you planning for the end of the tax year?

If you’re the type of person who leaves things to the last minute, you might not be thinking about tax-year-end planning. However, the 2021-2022 tax year will be ending on Tuesday 5th April 2022.

With no Spring Budget this year and the Easter holiday not falling until 15th April, there’s nothing standing in the way of your preparations for the end of this tax year and the start of the next one.

You still have several weeks to get your tax affairs in order and take advantage of the available tax allowances. The sooner you start, the better – so here are some key factors you need to consider.

Pension planning

Pension contributions are one of the few methods of receiving income tax relief whilst also reducing your taxable income. This is important when your taxable income can determine all your benefit and tax relief allowances.

It’s worth regularly contributing as much as you can afford to your pension pot. Not only will you be setting money aside to support yourself in your eventual retirement, but you’ll also have something to pass on to your family when you’re gone.

The annual pension contribution cap for UK residents under 75 years old is £40,000 or 100% of your earnings – whichever amount is lower. This is a gross pre-tax figure, so the maximum net payment is likely to be around £32,000.

No tax relief is available for pension contributions if you’re over 75 years old, and the allowance is tapered for higher earners under 75. If your annual income is more than £240,000, your pension contribution allowance will be reduced by £1 for every £2 above this.

The pension contribution lifetime allowance is frozen until April 2026, so you can contribute a maximum of £1,073,100. However, many people aren’t aware that you can actually ‘carry forward’ your pension allowances for up to three years.

This means that if you contributed less than £40,000 in previous tax years, you could add your unused allowances to your current annual limit and extend the total capacity. If you are able to do this, you have until 5th April 2022 to use your allowance from the 2018-2019 tax year.

Inheritance tax planning

Now we know that the Chancellor isn’t introducing any major Inheritance Tax (IHT) reforms, you have a reliable framework for IHT planning. The IHT threshold is still frozen at £325,000 until 2026, and the standard IHT rate remains at 40%.

This high tax can come as a shock for grieving family members inheriting your estate, so it’s worth doing whatever you can to reduce your estate’s taxable value. This includes using all the tax reliefs available to make things easier for your beneficiaries.

The annual Inheritance Tax gifting allowance allows you to gift up to £3,000 a year tax-free. You can ‘carry forward’ an unused allowance for one year only, but these allowances apply per person – meaning a couple could give away up to £12,000 tax-free.

If you haven’t already and plan to do this, you’ll have until 5th April 2022 to gift your full allowances for the 2019-2020 and 2020-2021 tax years (totalling a maximum of £6,000 per person).

You can also make small gifts of up to £250 for as many people as you like each tax year – as long as none of them are also recipient of your £3,000 gifting allowance. There’s no ‘carrying forward’ for these donations, though, so you have to use them within the year.

Other ways to reduce your taxable estate value and help your family include regularly making small financial gifts, such as setting up Junior ISAs for grandchildren or paying for family holidays. This can be a complicated area, though, so you might want to seek professional advice.

Capital gains tax planning

As with Inheritance Tax, the Chancellor has already made the public aware of Capital Gains Tax (CGT) changes. The CGT-free allowance is staying at £12,300 per tax year and CGT rates are also remaining the same, which makes year-end planning easier.

Capital Gains Tax is one of the most complex, so many people fall into the CGT trap of either not paying what they owe or paying more than they should. To make sure you don’t get caught in these traps, be sure to use your CGT allowances to the full by 5th April 2022.

You’re only liable for Capital Gains Tax when you sell an asset, or multiple assets, and make a total profit of £12,300 or more. Taxable asset sales could include real estate, stocks and shares, or valuables like antiques and jewellery.

For profits above the CGT threshold, the CGT rate depends on your level of Income Tax. If you’re a basic-rate taxpayer, you’ll be charged 10%, while higher-rate taxpayers will be charged 20%. When selling property specifically, the respective rates are 18% and 28%.

If you want to reduce your CGT bill, there are ways to be smarter about your annual allowances:

  • Claim for ‘allowable expenses’ like house repairs
  • Hold shares in an ISA so they’re exempt from taxes
  • Transfer assets to your partner to use their allowance
  • Defer a sale until after the end of the tax year

Like Inheritance Tax, you can’t carry your annual Capital Gains Tax allowance forward, so you have to use it before the end of the tax year. However, you could sell an asset before the end of this tax year, then sell another after 6th April 2022 to use both annual exemptions in succession.

Make the most of your annual tax allowances

If you need expert assistance with your personal finances, don’t wait until the very last moment to benefit from year-end planning. Some decisions take time to make and may also require collecting important data first – such as pension figures or asset values.

In many cases, tax relief allowances can’t be carried to the next year if you don’t use them – so you must use them or lose them. It’s vital to act now and seek advice on shaping your financial future by the end of the current tax year on 5th April 2022.

Here at GBAC, we offer professional tax consultancy services for individuals and businesses. We also provide probate services covering IHT and estate planning. If you believe you could benefit from our tax-year-end support, please get in touch on 01226 298 298 or at info@gbac.co.uk.