The UK tax year ends on 5 April 2020 and so February and March can provide a last-minute chance to save some tax with a bit of careful end of year tax planning. We’ve put together ways to minimise your tax bill below.
Additional rate taxpayers
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. Therefore, if you earn £125,000 or more, you will not receive a tax-free personal allowance at all. The additional rate income tax (45%) is also charged on earnings of over £150,000. Pension contributions and moving investments to a lower-rate tax-paying spouse could reduce this liability.
Utilise your spouse’s personal allowance
If your spouse is a lower or non-taxpayer, it’s possible for them to transfer 20% of their unused personal allowance to their partner which could save up to £250 in tax.
Also, if you have income-producing assets (for example, buy-to-let property or even saving accounts), you could put these in the lower or non-taxpaying spouse’s name to lower your overall Income Tax liability. Assets can be passed between spouses without any CGT liabilities.
Use your Individual Savings Account (ISA) allowance
The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple can invest £40,000 before the end of the tax year on 5 April. There is no Capital Gains Tax (CGT) and no tax on UK income and no need to declare this on your tax return. If you do not make use of your ISA allowance it cannot be carried forward, so “use or lose it”!
If you would like more information on ISAs please see our Guide to ISAs.
Use your tax-free pension allowance
The standard annual pension allowance is £40,000 per person in the current tax year. This is reduced if your income exceeds limits or have taken pension benefits previously. However, if you are a higher-rate or additional rate taxpayer and have enough relevant UK earnings, you can claim the extra tax relief. You can also carry forward any unused annual allowance from the three previous tax years, so long as you were a member of a registered pension scheme.
Save into a pension for your children or grandchildren
Consider saving up to £3,600 into a pension for your spouse, civil partner or a child,
even if they have no earnings of their own, to obtain basic rate tax relief on the contributions.
Find out more about this in our article on paying into a pension for your children here.
Capital Gains Tax (CGT)
Individuals have an annual CGT allowance that currently enables them to make gains on investments of up to £12,000 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% with disposals of residential property being taxed at 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Married couples may be able to use each other’s allowances by transferring assets before they are sold.
CGT changes to the disposal residential property from 6 April 2020
From 6 April 2020, we are due to see some significant changes to the CGT regime in respect of the disposal of residential property and a reduction in the reliefs that may be available.
Private Residence Relief will be restricted and lettings relief abolished after this date and there will be a requirement to report the capital gain and pay the associated tax due within 30 days of completion.
It is worth considering bringing any sale forward, but with 6 April fast approaching this may not be possible. However, if you are considering gifting a property to a family member, you may wish to do it sooner rather than later to take advantage of current reliefs.
It may also be worth considering selling an asset to crystallise a capital loss before any potential property sale as a means of reducing CGT payable.
Inheritance Tax (IHT)
You may wish to consider using your annual gift allowance of £3,000. Although you can carry this forward for one year, it is then lost if it is unused. You may have an unused gift allowance for 2018/19 which can still be used until 5 April 2020.
New rules on Inheritance Tax (IHT)
The new ‘residence nil-rate band’ (RNRB) now enables a ‘family home’ to be passed wholly or partially tax-free on death to direct descendants. This extra tax-free amount is phased in over four years, initially at £100,000 for 2017/18, rising each year to reach £175,000 each in 2020/21. The RNRB is in addition to an individual’s own nil-rate band; currently £325,000 per individual. The rules surrounding the RNRB are complex and the deceased may be entitled to RNRB despite not owning a ‘family home’ on death.
The Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and the Seed Enterprise Investment Scheme (SEIS) are worth a thought. EIS investments offer an Income Tax credit and CGT deferral.
Need help with your year-end tax planning?
Keep up to date with the latest tax deadlines here.