Year-end tax planning for individuals

8 Feb 2022

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We outline the actions that individuals can take before the end of the UK tax year to ensure they are making the most of the available allowances and reliefs open to them.

Income tax planning

Income tax rates remain unchanged in 2021-22 for those living in England and Northern Ireland. The devolved Welsh rates of income tax have been set at a level that means Welsh taxpayers will pay the same tax rate as taxpayers in England and Northern Ireland.

Scotland has exercised its devolved rights over income tax by introducing a system with five tax rates and bands for non-savings and non-dividend income. For Scottish taxpayers, this may mean they now pay a higher amount of tax than an English or Welsh taxpayer in a similar situation, depending on the type of income they receive.

2021-22 rates and thresholds are shown in the table below.

Allowances for individuals:

  • Personal allowance of £12,570: this is progressively withdrawn for individuals earning more than £100,000, leading to a marginal rate of 60% on income between £100,000 and £125,140. Non-domiciled individuals claiming the remittance basis are not entitled to a personal allowance.
  • Personal savings allowance: the first £1,000 (basic rate taxpayers)/£500 (higher rate taxpayers)/£0 (additional rate taxpayers) of savings income is taxed at 0%.
  • Dividend allowance: the first £2,000 of dividend income is taxed at 0%.

Although no tax is due on income within the personal savings allowance or dividend allowance, it is taken into account when calculating an individual’s marginal rates of tax on any taxable savings and dividend income.

Self-assessment key dates

Click here to see the self-assessment key dates.

Top tips

  • Consider taking action to reduce taxable income, particularly where income falls just above one of the thresholds. There are various options to achieve this, including pension contributions or investments in a Venture Capital Scheme.
  • If you have children, it may be possible to switch income from one spouse to the other, so that both spouses’ incomes remain below the £50,000 threshold for the High Income Child Benefit Charge.
  • If possible, bring forward the payment of dividend income ahead of 6 April 2022 to benefit from the lower rates of taxation applicable to dividend income in the 2021-22 tax year – see ‘Looking forward’ below for more details.

Looking forward

The income tax personal allowance and higher rate threshold will remain frozen for English and Northern Irish taxpayers at £12,570 and £50,270 respectively until April 2026.

The Scottish income tax rates will remain the same for 2022-23. The starter and basic rate bands will increase by 3.1%, in line with CPI inflation, while the higher and top rate thresholds remain frozen. Welsh tax rates and thresholds were still to be confirmed at the time of writing this.

From 6 April 2022, the rates of income tax applicable to dividend income will increase by 1.25%. The dividend ordinary rate will be 8.75%, the dividend upper rate will be 33.75% and the dividend additional rate and the dividend trust rate will be 39.35%. The dividend trust rate will also increase to 39.35%. These changes will apply UK-wide.

As further detailed in this article, an additional 1.25% Health and Social Care Levy will be added to the rates of National Insurance for employees and employers, including the self-employed, from 6 April 2022. From April 2023, this levy will be separated from the main National Insurance rates into a separate levy in its own right, meaning it will be payable by employees of pension age.

Gift Aid

This is a valuable relief for gifts to charities: the gift is made out of the donor’s taxed income and the charity benefits by claiming basic rate tax on the value of the gift. Higher rate taxpayers can claim extra tax relief of 20% and additional rate taxpayers 25% of the gross value of the gift. There is no cap on the amount that can qualify for Gift Aid relief, provided the donor has paid sufficient tax during the tax year to cover the charity’s reclaim from HMRC.

For example, if you are a higher rate taxpayer and you make an £80 donation to a charity, the gross value of the gift to the charity is £100, since it can claim back the basic rate tax of £20. You can claim an additional 20% tax relief on the gross value, reducing the net cost to £60.

For a donation to qualify for tax relief, the charity must be located in an EU member state (plus Iceland, Norway and Liechtenstein) and must be recognised as a qualifying charity by HMRC.

Top tips

  • You must provide the charity with a Gift Aid declaration, so that both parties can claim the relevant tax relief.
  • You can elect for donations made in one tax year to be treated for tax purposes as made in the prior year. This would be of benefit, for example, if you are a higher or additional rate taxpayer in 2021-22 but not in 2022-23. In other cases, it will merely accelerate the higher/additional rate relief. The election can only be made when submitting your tax return, which must be filed on time.
  • Donating assets (eg shares, land and property) to charity can also attract tax relief. Additionally, any gain arising on the donation of such assets is exempt from CGT, and the gift itself is not subject to IHT – potentially making an asset donation more tax-efficient for the donor.
  • If you are a non-domiciled remittance basis taxpayer, you can make a charitable donation from untaxed foreign income, either to a qualifying overseas charity or to the non-UK bank account of a UK charity, and qualify for Gift Aid relief against your UK taxable income. Professional advice should be sought, as this is a complex area.

Capital gains tax planning

The annual exemption remains at £12,300 for 2021-22. Gains above this level are taxed as follows:

  • 10% if the gains qualify for Business Asset Disposal Relief (BADR) (previously Entrepreneurs’ Relief), up to a lifetime limit of £1 million;
  • 10% if the gains qualify for Investors’ Relief, up to a lifetime limit of £10 million;
  • 10% (18% for gains in respect of residential property or private equity carried interest) if the gains fall within the unused basic rate band; and
  • 20% (28% on residential property or private equity carried interest) for gains above the basic rate band.

Assets transferred between married couples or civil partners do not normally give rise to a CGT charge.

Non-residents are not generally subject to UK CGT. There is an exception to this rule, however, for disposals of UK immoveable property, and certain indirect interests in UK immoveable property.

Non-domiciled individuals claiming the remittance basis of taxation should take professional advice, as the rules relating to remitted capital gains are complex. The annual exemption will not be available and it may not be possible to claim relief for overseas capital losses.

Top tips

  • The annual exemption cannot be carried forward or transferred, so aim to make disposals before 6 April 2022 to utilise this year’s exemption.
  • Consider transferring assets to your spouse or civil partner, to utilise their annual exemption or capital losses. Such transfers must be made outright and without preconditions to be effective for tax purposes.
  • The timing of a disposal may affect the amount of CGT payable. For example, if you are a basic rate taxpayer in 2021-22 but expect to be a higher rate taxpayer in 2022-23, realising a disposal in 2021-22 so that some or all of the resulting gain falls within the basic rate band will reduce the amount of CGT payable (albeit with a one-year acceleration of the tax).
  • For disposals that complete on or after 27 October 2021, the deadline to report the disposal and pay any tax due to HMRC was extended from 30 to 60 days.

Looking forward

There are no plans for significant reform to the CGT regime, but the government has accepted a handful of the recommendations from the Office of Tax Simplification’s (OTS’) review into CGT, including the integration of CGT into the Single Customer Account, extending the ‘no gain, no loss’ window when couples divorce, expanding the rollover relief rules where land and buildings are acquired under Compulsory Purchase Orders, and improving HMRC guidance in a number of areas.

Inheritance tax planning

Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets. Non-domiciled individuals (non-doms) are normally subject to IHT on their UK assets only.

An individual is deemed UK domiciled once UK resident for at least 15 of the immediately preceding 20 tax years. Non-doms born in the UK with a UK domicile of origin will, however, generally be deemed domiciled from the date at which they become UK resident, although there is a limited grace period for IHT purposes only.

IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB). The NRB is £325,000 for 2021-22.

The NRB can be transferred to a spouse or civil partner, so couples can enjoy a combined NRB of up to £650,000 on the second death. The amount transferable is the percentage of the deceased’s unused NRB at the time of their death, as applied to the NRB in force at the date of the second death.

An additional NRB is available in respect of a property that at some point has been the deceased’s main residence and which is passed on death to a direct descendant. For 2021-22 the additional NRB is £175,000. If unused, this relief will also be transferable to the deceased’s spouse or civil partner. The relief will be tapered where estates are over £2 million in size.

Estates over £2.7 million receive no benefit from the additional NRB.

Top tips

  • Consider gifting assets during your lifetime to minimise the IHT payable on your death. Such gifts will fall outside the IHT net after seven years, provided you do not reserve a benefit in the asset transferred. By making a gift now, you can start the seven year IHT ‘clock’, and after three years the amount of IHT potentially payable on the gift is tapered. The gifting of assets can give rise to CGT and may impact upon your lifestyle, so professional advice should always be obtained.
  • If you have income surplus to your normal living expenses, consider making use of the IHT exemption for gifts out of income. Such gifts are tax-free, even where death occurs within seven years. Appropriate documentation should be retained to show that the gift is regular and made from income not required by the donor to cover their living expenses.
  • Make use of other IHT reliefs and exemptions, such as the annual gifts exemption of £3,000 (£6,000 if no gifts were made during 2020-21), the small gifts allowance of £250 per donee, and gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else).
  • Consider taking out life insurance written under trust to fund any contingent exposure to IHT.
  • Consider increasing bequests to charities to 10% or more of your net estate, which will mean that a reduced IHT rate of 36% applies to the remainder of your estate. A carefully drafted will is essential to ensure that the desired result is achieved.

Looking forward

Following the OTS’ review into IHT, the government has said it will not proceed with any changes to IHT at the present time.

Pensions

Contributions to pension funds within the annual allowance and the overall lifetime limit of £1,073,100 attract relief at your marginal rate of tax. The combination of tax relief on contributions, tax-free growth within the fund, and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings vehicle. Saving for retirement should always be considered as part of the year end tax planning process.

This is particularly important for those with an annual adjusted income in excess of £240,000, since the annual pension contributions limit of £40,000 is tapered by £1 for every £2 of income in excess of £240,000, reducing to a limit of £4,000 for those with income over £312,000. No tax relief is available for contributions in excess of the available annual allowance.

The annual allowance can be carried forward for three tax years. Any unused annual allowance for the three previous years can be added to your allowance for 2021-22 and will attract full relief (subject to the level of pensionable income).

If you are approaching retirement and are considering drawing benefits, take advice to ensure that you understand the tax implications of accessing your pension fund.

The National Minimum Pension Age (NMPA) is currently 55 – those aged 55 or over can access their pension fund flexibly, with no restrictions on the amount they can withdraw. They can draw down the entire pension fund if they choose, although there are tax consequences.

Top tips

  • Pensions scams are becoming more common and can result in the loss of all or part of your pension pot, a penalty tax charge from HMRC, or both. Before committing to any changes to your pension fund, it is vital to take proper advice.
  • Consider making additional contributions to your pension scheme before the end of the tax year to obtain relief at 40% or 45%, depending on whether you are a higher rate or additional rate taxpayer, taking care not to breach your available annual allowance or the lifetime allowance. Contributions may be of particular benefit where your income is just above one of the income tax thresholds, or between £100,000 and £125,000 (tax relief is available at 60% on income falling within this bracket).
  • Review the availability of any unused allowance for the 2018-19 tax year, as this will expire on 5 April 2022.
  • Consider making contributions of up to £3,600 to a pension scheme for a spouse, civil partner or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions. For example, if you contribute £2,880, HMRC will pay in £720, giving a gross contribution of £3,600.
  • If you make pension contributions after flexibly accessing your pension savings, you have a reduced annual allowance of £4,000. Make sure that you keep contributions below this level to avoid a charge.
  • If you have sufficient income, consider not drawing your pension and treating it instead as an IHT wrapper.

Looking forward

The Normal Minimum Pension Age (NMPA) will rise to age 57 from 6 April 2028, to coincide with the increase of the state pension age to 67. This change will primarily affect those who are approaching retirement age and who planned on taking payments from their pension schemes between their 55th and 57th birthday.

These individuals will now be subject to unauthorised payments income tax charges of up to 55% on any amount taken before age 57 after this date (unless they are retiring due to ill health).

This change will not affect those with a protected pension age, for whom their protected pension age replaces the NMPA for most purposes. It will also not affect members of the firefighters, police and armed forces public service schemes.

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This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 January 2022. The FCA does not regulate tax advice.

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