Year-end tax planning – what you need to review before 6 April 2021
With the new tax year starting on 6 April 2021, now is the time to review both your businesses and your own personal tax, to make sure all tax reliefs and allowances available have been utilised in the current tax year. It is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.
With many individuals and businesses likely to have been impacted by COVID-19 over the last 12 months, it is more important than ever that to undertake a detailed review of the current year and plan for the year ahead.
There is currently a focus in the media that the budget on 3 March 2021 will look to raise taxes in certain areas, adding to the importance to utilise all current allowances and reliefs available.
There has been much debate as to whether Capital Gains Tax will increase, following a report from the Office of Tax Simplification (OTS) in November 2020. It has also been speculated that the Chancellor is considering raising Corporation Tax, to claw back the spending on support provided during the Covid-19 pandemic. A 1% rise in Corporation Tax could generate circa £3bn a year but may face political backlash from MPs looking to attract and retain business following Brexit.
It is crucial that year-end tax planning reviews are undertaken as soon as possible, as you will need time to consider all options available, as many of the allowances and reliefs cannot be applied retrospectively after 5 April 2021.
If you require advice or guidance on tax planning as we reach the end of the tax year or indeed for the year ahead, please do not hesitate to contact our specialist tax team. We can provide a comprehensive review, tailored to individual needs and circumstances.
The summary below outlines some of the tax issues that you should now be considering, to ensure you utilise the maximum tax savings as possible and all reliefs and allowances available are being fully utilised:
Income Tax and National Insurance
The personal allowance for income tax this year is £12,500, which cannot be carried forward, so it is important to try and use this.
There may be a benefit of ensuring a salary is paid of at least the lower earnings limit National Insurance threshold of £6,240, to ensure that credit is obtained for the years contributions towards the state retirement pension. Furthermore, drawing a salary of up to £9,504 can maximise the use of personal allowances and reduce corporation tax, without payment of class 1 National Insurance contributions.
Dividends – A straight-forward point to consider is whether you have made full use of the tax-free dividend allowance of £2,000. This is available to everyone and not restricted by earnings, so if you are an owner-manager with profits available to distribute, taking a £2,000 dividend is a no brainer. If you have not yet taken advantage of this in the current tax year, consideration should be given as to whether it is advantageous to pay this before 6 April 2021.
Additionally, if you intend to pay a dividend greater than £2,000 in 2020/21 and haven’t used the full £2,000 tax-free allowance in the current tax year, consideration should be made to making part of this payment early.
It may also be advantageous to pay a larger dividend, rather than a salary above £8,632, as this may raise 1 National Insurance contributions.
Salaries – if you are considering paying a salary in the 2020/21 tax year above the thresholds mentioned above and haven’t yet, it may be prudent to consider further payments before 6 April 2020 as an alternative.
Spouses and civil partners – An individual may be able to transfer 10% of their personal allowance to their spouse or civil partner, providing they both meet certain criteria. This could reduce their tax bill by up to £250 in the tax year An election to do this can be made up to four years after the end of the year in which it relates.
Pensions – Pensions are generally very tax-efficient, with £40,000 being able to be paid in each year if your income is less than £150,000. If your income exceeds £150,000, the amount you can put into your pension and receive relief is restricted. Any unused amounts can be carried forward and used in the following three years.
The lifetime allowance is currently £1,073,100.
Inheritance Tax – Gifts of up to £3,000 a year can be made without any implications for inheritance tax, and this can be carried forward for one year.
Tax-efficient investments – ISAs are a tax-efficient way to save for higher rate taxpayers. The maximum allowance is £20,000.
You could also consider investing in Enterprise Investment Schemes and Seed EIS Shares. Tax relief is available when you subscribe to shares which meet the qualifying criteria for each scheme. Under the EIS scheme, tax liability for the year may be reduced by up to 30% of the amount invested. It also has the benefit that capital gains form disposals can be reinvested into the scheme, allowing a deferral of the gain.
Capital Gains Tax
The 2020/21 annual allowance is £12,300, which cannot be carried forward. It is always worth checking if this has been utilised correctly if you have disposed of any assets, including businesses and property. If you are in the process of selling a business or property, professional tax advice should be sought, as to the most tax-efficient way of structuring a deal.
If gains are made in the year, these can be set against any losses occurred in the same year. It is therefore worth considering disposing of any assets that are standing at a loss to balance these gains.
Annual Investment Allowances – the Annual Investment Allowance was increased in the 2018 Budget from £200,000 to £1m from January 2019. Currently, up to £1m of qualifying expenditure is available for 100% relief in the year it was incurred.
Following a further extension, this higher limit is due to expire on 1 January 2022. It is, therefore, crucial to ensure you take full advantage of this substantially higher rate.
Private Residence Relief and Lettings Relief – Private Residential Relief and Lettings Relief were considerably reduced in April 2020. Notwithstanding this, it is important to make sure, where eligible, that you take full advantage of these reliefs.
Private Residence Relief (PRR) currently allows an additional grace period of the last nine months of ownership. Lettings Relief is now limited and is available if you share your home with a tenant or have moved into care. If your property has increased in value since purchase, this can still have a significant impact on your capital gains tax bill.
With potential changes to Capital Gains Tax expected it is important to seek advice should you have disposed of property in the current tax year or are expected to do so in the future.
Non-residents – Since 6 April 2019, non-residents have been liable for capital gains tax on gains made on property and land in the UK.
From 1 April 2021 a new rate of Stamp Duty Land Tax for non-UK residents will apply. This increases the rates which will apply by 2%.
Capital Allowances – It is always important to review expenditure, which may qualify for Capital Allowances Relief. Alongside plant and machinery, this includes research and development (see below), patents, specific intellectual property and buildings and renovating business premises in specific areas, amongst other items.
There are strict deadlines for claiming capital allowances. Capital Allowances can offer very generous tax allowances of up to 100%, which can result in significant tax savings and these should be considered carefully.
Research and Development Tax Relief – Many businesses miss out on this generous type of relief as they incorrectly believe that they are not eligible to receive it. It is always worth taking advice to review your specific circumstances, to ascertain if you are eligible to claim.
A common misconception is that R&D tax relief only applies to science and technology companies, or those with specialist research and development departments. In fact, all industries can reap the benefits from R&D Tax Relief, providing the project either seek to advance their knowledge, improve a service or product or solve uncertainties in a process.
It is important to review this before the tax year-end as deadlines will apply, dependent upon when the work was completed.
Certain caps on R&D tax relief will be introduced for SME businesses in April 2021. In certain circumstances, the amount that can be claimed may be capped at £20,000 plus three times the company’s relevant expenditure on workers. Should this apply, our R&D tax team will be able to advice you and agree a strategy to help.
IR35 roll out to the private sector
On 6 April 2021, changes come into effect regarding off-payroll working for intermediaries and contractors. These were originally due be implemented in 2020 but were delayed due to Covid-19.
In a nutshell, many private companies that employ contractors will be liable to pay their tax and national insurance contributions.
IR35 rules are complex and if organisations get them wrong, they risk taking on their contractors’ tax liability, which can be significant, in addition to fines.
From 6 April 2021, all medium or large-sized private sector clients (as well as all public sector clients) will be responsible for deciding their worker’s employment status. This includes some charities and third sector organisations.
If IR35 off-payroll working rules apply, your worker’s fees will be subject to tax and National Insurance contributions. If these are not paid, it will be yourself that remains liable for these charges, not the contractor.
It is important that anyone using contractors or intermediaries is familiar with these rules and has carried out an assessment to determine their workers status. Further information on this can be found here. For assistance on this matter, please contact us.
Property Investment Businesses
For residential buy-to-let investors, mortgage interest is now only eligible for income tax relief at the basic rate of 20%, regardless of tax bracket.
As this has reduced from previous tax years, this may have increased taxable income, increasing certain thresholds, which could reduce eligibility for child benefit, personal allowance or pension savings annual allowance, and push some taxpayers into a higher tax band.
For these reasons, it may benefit to consider the merits of setting up a limited company for buy-to-let properties that you hold personally. More information on this can be found here.
Corporation Tax remained at 19% in 2020/21. It is unlikely this will decrease, and there are some discussions around whether this may increase. It would be frugal to check that this has been included in this year’s cash-flow calculations and to consider the impact any potential increase may have on your business going forward.
Other items to consider
The tax year-end also provides an opportunity to review your business activities, and to look at ways to be more tax efficient. Other items to consider include:
Accounting dates – is your own year-end date at the most useful point in the year for your company? Would it be advantageous to align this with a key date in your business calendar?
Incorporation – If you trade as a sole trader, a partnership or an LLP, it is a good point in the year to review your circumstances to ascertain if it would be more tax-efficient to incorporate as a limited company.