The budget has come and gone with no major changes to taxation. However, there have been some minor changes or clarifications which can have a long-term impact.
Below we have listed some considerations there may be before the end of the tax year. To be clear none of this represents advice and you should get advice from a qualified financial adviser before putting anything in place.
Things to consider with income tax
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Reduce taxable income below £150,000 to avoid a 45% tax rate.
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Pension contributions are one of the few ways to reduce taxable income.
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For married couples / civil partners, ensure each has sufficient income to use their personal allowance: £12,500 in 2020/21. This will increase to £12,570 for 2021/22 and remain at that level until 5 April 2026.
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The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000.
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If income is above £100,000, then individual pension contributions before 6 April 2021 can reduce income to £100,000 to restore all or part of a 2020/21 personal allowance which would otherwise be lost.
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Whether your investment portfolio can be made more tax-efficient, potentially via ISAs, or Investment Bonds.
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Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond. (Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.)
Things to consider with capital gains tax
The term “capital gains tax planning”, in this context, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:
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timing of the transaction, e.g. bringing the transaction forward or delaying it
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ensuring that full advantage is taken of all available exemptions and reliefs
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depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse or the use of a trust
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using the annual exempt amount; and
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making full use of any available losses.
Capital gains tax planning considerations:
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Maximising the use of this year’s annual exemption (currently £12,300) as any amount unused cannot be carried forward.
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Deferring the payment of tax for a year by making a disposal after 5 April 2021.
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Using two annual exemptions in quick succession, make one disposal before 6 April 2021, and another after 5 April 2021.
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Ensuring each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this. (Any such transfer must be outright and unconditional. In transactions that involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss).
It should also be borne in mind that from 6 April 2020, a return in respect of the disposal of a residential property made by a UK resident (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time.
In July 2020, the Chancellor asked the Office of Tax Simplification (OTS), to review capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11 November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. However, no such announcements were made in the March 2021 Budget. Instead, the Government announced that the annual capital tax exemption would be frozen at £12,300 until 5 April 2026.
Inheritance tax
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Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2021.
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The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax, provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption.
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For those who have income that is surplus to their needs, it may be appropriate to establish arrangements whereby regular gifts can be made out of income to utilise the normal expenditure out of income exemption.
An all-party parliamentary group (APPG) of MPs recently recommended that all the existing lifetime gift exemptions, such as small gifts and normal expenditure, should be scrapped and replaced by a single annual gifts allowance, which the APPG suggested would be set at £30,000. The Office of Tax Simplification (OTS) also recently produced a report on the simplification of IHT in which they proposed a figure of £25,000.
No such changes were announced in the March 2021 Budget. However, the Government announced that the inheritance tax nil rate band and residence nil rate band would be frozen at £325,000 and £175,000 until 5 April 2026, and the residence nil rate band taper will continue to start at £2 million. Therefore, as wealth continues to rise, considering how to mitigate inheritance tax should start as early as possible.
Savings and investments
Savings income and dividends
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Married couples / civil partners could ensure each has sufficient savings income to use their £500 or £1,000 personal savings allowances, and sufficient dividends to use their £2,000 dividend allowances.
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Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in the tax year 2020/21.
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The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so in 2020/21 people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £17,500. Where interest is due just after 5 April 2021, closing an account just before the tax year-end can bring that interest forward to the 2020/21 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year.
ISAs and JISAs
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Those with spare cash could consider maximising annual subscriptions (£20,000 and £9,000 respectively) before 6 April 2021 as any unused subscription amount cannot be carried forward.
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The annual ISA and JISA subscription limits remain at £20,000 and £9,000 for 2021/22.
EISs/VCTs
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For subscriptions to be relieved in the tax year 2020/21 they must be made before 6 April 2021.
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EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. The maximum income tax relief is 30%. Unlimited capital gains tax deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2019/20 it must be paid before 6 April 2021.
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VCTs – Up to £200,000 can be invested. The maximum income tax relief is 30%. No ability to defer capital gains tax, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax-free.
Would-be investors must be aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.
Investment bonds
Investment bonds can deliver valuable tax deferment.
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To minimise taxation on encashment, it may be worth considering deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or the investor is a basic rate taxpayer. In the meantime, if cash is required, the investor can use the 5% tax-deferred annual withdrawal facility.
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Alternatively, it may be worth considering assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment.
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Another option might be to consider triggering a chargeable event gain before the end of this tax year, by full encashment/surrender, so that the liability to tax falls in 2020/21 if tax rates will be higher in the future for the individual.
Pensions
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The carry-forward rules allow unused annual allowances to be carried forward for a maximum of three tax years.
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This means that 5 April 2021 is the last opportunity to use any unused allowance of up to £40,000 from 2017/18.
In 2020/21, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000 respectively. These levels could mean that fewer pension members will be impacted by the tapered annual allowance from 2020/21, than in earlier years. This means more pension savings and the possibility of avoiding a tax charge. Note that the minimum the taper can take the annual allowance down to is £4,000 from 2020/21, a reduction from the previous £10,000. This will not have an impact on earlier tax years, and it will not affect the amounts of unused annual allowance available for carry-forward from tax years before 2020/21.
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For those who are high earners, however, it’s still important to check if the likelihood of being subject to the tapered annual allowance and whether there is anything that can be done about it.
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If there is sufficient carry forward and threshold income is only just above £200,000 for 2020/21, making additional individual pension contributions could reinstate the whole of the 2020/21 annual allowance.
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The personal allowance reduces by £1 for every £2 for those with adjusted net income above £100,000. This means that, for 2020/21, there will be no personal allowance available once adjusted net income exceeds £125,000.
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Making extra pension contributions not only increases pension provision but for those who may be subject to a reduced personal allowance a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice.
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In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has an income of more than £50,000 and the benefit is totally lost when income reaches £60,000.
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Individuals could consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings as the £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax-free returns.
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In the March 2021 Budget, the Government announced that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026 so those who have funds close to or exceeding the lifetime allowance may need to review any previous decisions in respect of continuing to fund their pensions and or deferring crystallising their benefits based on the expectation of inflationary increases.
