Your Year-End Tax Planning Guide

The current tax year ends on 5th April, it is important you review your finances in advance.

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs available and have considered some planning opportunities to help reduce your tax liabilities.

Our tax team have worked together to create a handy year-end tax planning guide, offering a checklist of some of the key tax-efficient planning options you might wish to implement before 5 April 2022.

The guide is for individuals and companies and it summarises key tax and financial planning tips that must be actioned prior to 5 April 2022.

Personal tax planning:

Personal allowances

Every individual is entitled to their own personal allowance (PA), which is £12,570 for the 2021/22 tax year. A key element in tax planning is to make the best use of the PA. If your spouse or civil partner has little or no income, you might want to consider the ownership of income-producing assets. This may involve redistributing income-producing assets to minimise your overall tax liability.

Certain couples may also be eligible to transfer 10% of their PA to their spouse. The Marriage Allowance is available to married couples and civil partners where one spouse has income below the PA and neither spouse pays tax at the higher or additional rate. It means £1,260 can be transferred in 2021/22, reducing a couple’s tax liability by up to £252 in the current year.

Reduce taxable income

It is possible to reduce your taxable income through various means (for example, increasing contributions into a pension scheme or making charitable donations via Gift Aid). This may be beneficial if you or your spouse or partner are receiving Child Benefit and either of your incomes are expected to be between £50,000 and £60,000. Reducing income to below this level may help to eliminate the High Income Child Benefit Tax Charge. You might also want to consider something similar if your income is just above £100,000, as the PA is reduced by £1 for every £2 of income over this figure.

Inheritance Tax

Inheritance tax (IHT) is payable where an individual’s wealth is in excess of £325,000 (the nil-rate band). Those who own property and have savings, business assets or life assurance policies could be liable to IHT.

It is vital that you plan ahead to minimise their exposure to IHT.

IHT is charged at 40% on the proportion of an individual’s taxable estate exceeding the nil-rate band. An estate includes both the value of assets held at death, plus the value of any lifetime gifts made within seven years of death.

The residence nil-rate band (RNRB) applies where a residence is passed on death to one or more direct descendants. The RNRB is set at £175,000 for 2021/22.

Making lifetime gifts

You can give away a total of £3,000 as gifts each tax year without them being added to the value of your estate. This is known as your annual exemption (AE). You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.

You can give as many small gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are also exempt from IHT.

Business Tax Planning:

Dividend, salary or a bonus?

Dividends are paid from the profits available after Corporation Tax is paid. A salary or a bonus generally creates tax charges for the company, carrying up to 25.8% in combined employer and employee national insurance contributions (NICs). Dividends, however, are paid free of NICs.

The Dividend Allowance (DA) currently sits at £2,000 per year. The DA charges £2,000 of the dividend income at 0% tax: this is called the dividend nil-rate. The rates of tax on dividend income above the allowance are 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers.

The government has announced an increase to the rates of tax paid on dividends by 1.25% from 6 April 2022 to help fund the new planned investment in health and social care. The new rates will therefore be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

There are some alternative profit extraction ideas for individuals to consider. These include:

  • making pension contributions – employer pension contributions often prove to be very tax-efficient when it comes to extracting profit from a company
  • taking incorporation into account – self-employed individuals or those with partner status may want to consider incorporating. This may provide more scope for saving or deferring tax
  • utilising tax-free allowances such as mileage payments, which apply when you drive your own car or van on business journeys
  • making the most of property – you are entitled to receive rent up to the market value on property that is owned by you and used for business purposes.

Capital allowances

The majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure on most types of plant and machinery (except cars).

The AIA will remain at £1,000,000 until 1 April 2023, when it reduces to £200,000 for expenditure incurred after this date.

Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery may benefit from a new first-year allowance (FYA). A company will be allowed to claim a super-deduction of 130% on certain new plant and machinery investments.

Company cars

From 6 April 2022 Class 1A NICs payable on company car benefits will increase by 1.25%, making the employer’s contribution 15.5%. It may prove more financially sound to pay employees for business mileage in their own vehicles at the statutory mileage rates.

You may also wish to consider the provision of electric company cars.  Cars with no CO2 emissions qualify for 100% First Year Allowances.

It is essential to act now in order to maximise tax reliefs – don’t leave it until 5 April 2022.