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Planning to minimise your 2021/22 UK tax bill

The 2021/22 UK tax year ends on 5 April 2022, and there are a number of things you can do to ensure that your tax bill for the year (payable by 31 January 2023) is as low as possible. Here we explore a few practical opportunities.
Planning with uncertainty

Planning with uncertainty

While we wait to see what the UK Chancellor announces at his Spring Forecast Statement on 23 March 2022, under current announcements and with regards to personal taxation, the personal allowances and tax bands affecting individuals, which were raised in 2021/22, will remain frozen until 6 April 2026. Combined with expected wage inflation, this will pull more people into the higher rate of tax. Despite the weight of speculation, the Chancellor has so far passed over the opportunity to raise Capital Gains Tax (CGT) rates last year, but rate rises in the future cannot be ruled out. 

The UK government has also so far stuck to its intention to increase the tax rate on dividends by 1.25% and the rate of National Insurance Contributions by 1.25% for both employers and earners (whether employed or self-employed) from 6 April 2022. The combined increases will then be reclassified by the government as the Health and Social Care Levy from 6 April 2023 and the expected annual take of £12billion per year will be earmarked for social care reform.

About the author

Allan Wilkinson

+852 3192 7083
wilkinsona@buzzacott.hk
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Planning with uncertainty

While we wait to see what the UK Chancellor announces at his Spring Forecast Statement on 23 March 2022, under current announcements and with regards to personal taxation, the personal allowances and tax bands affecting individuals, which were raised in 2021/22, will remain frozen until 6 April 2026. Combined with expected wage inflation, this will pull more people into the higher rate of tax. Despite the weight of speculation, the Chancellor has so far passed over the opportunity to raise Capital Gains Tax (CGT) rates last year, but rate rises in the future cannot be ruled out. 

The UK government has also so far stuck to its intention to increase the tax rate on dividends by 1.25% and the rate of National Insurance Contributions by 1.25% for both employers and earners (whether employed or self-employed) from 6 April 2022. The combined increases will then be reclassified by the government as the Health and Social Care Levy from 6 April 2023 and the expected annual take of £12billion per year will be earmarked for social care reform.

Opportunities before year end

Opportunities before year end

So, what opportunities could you take advantage of in the run-up to the end of 2021/22? Below we’ve summarised a few of the most common for you to consider. Click the banners to view the opportunities and what you should do for each.

Income tax

Where available, UK taxpayers are entitled to a tax-free personal allowance of £12,570 for 2021/22, with the next £37,700 being taxed at 20%. Income between £50,271 and £150,000 is taxed at 40% and anything over £150,000 is taxed at 45%. There are different rates for dividends applicable to these income tax bands of 7.5%, 32.5% and 38.1% respectively. 

The personal allowance is phased out on income between £100,000 and £125,140, effectively creating a tax rate of 60% on income within this bracket. This can be reduced through the use of Gift Aid donations and pension contributions.

What should you do?

Ensure that there is sufficient income generated where possible to make best use of your personal allowances and basic-rate bands. Now that we know personal allowances and tax bands will be frozen for a further four years, it’s more important than ever not to waste them. This is even more important with the planned rise in the dividend and National Insurance rates from 6 April 2022, meaning that you only have until 5 April 2022 to fully utilise the rates in the last tax year before they go up. Ways you could do this include considering the timing of dividends or trust distributions. In addition, income-producing assets can be transferred between spouses without any liability to capital gains tax to ensure that both spouses are utilising their lower rates of tax.

Where your income is in the £100,000 to £125,140 bracket, consider the possibility of additional Gift Aid or pension contributions.

Capital Gains Tax (CGT)

Where available, UK taxpayers are entitled to a tax-free annual exemption of £12,300 for 2021/22 on capital gains. Rates are then charged at 10% for any remaining basic-rate band entitlement, with 20% charged on any remaining gains. The basic and higher rates rise to 18% and 28% for both residential property and carried interest.

There are also several important CGT reliefs to consider, such as Business Asset Disposal Relief (BADR). This was previously known as Entrepreneurs’ Relief and applies a CGT rate of 10% to gains realised on sales of trading businesses and shares in a trading company, subject to certain conditions. This is subject to a £1million lifetime limit.

Private Residence Relief is also available on any gain on the sale of your private residence in the UK, which exempts the gain for the period that it is your main residence as well as certain other periods. In many cases, it is straightforward to determine which property is your main residence, although it is possible to nominate a property if you have used more than one property for that purpose.

The CGT rates are historically low and continue to be subject to frequent speculation that they could increase in the near future. While we cannot predict future Budget announcements, the fact that the Chancellor passed up the opportunity to raise rates in 2021 does not necessarily mean that the rates will stay the same in future.

What should you do?

If possible, consider whether enough UK gains can be crystallised each year to utilise the annual allowance. This is particularly important with personal allowances currently being frozen. Also consider whether capital losses can be generated if large gains have already been realised. This may include negligible value claims against worthless assets, where these have not already been realised. It could also involve transfers between spouses before sale, to ensure that any losses are set against other gains. However, this may not always be appropriate, such as if you are envisaging large gains in future years where you think the CGT rate may be higher.

Likewise, if you are planning on making disposals that will crystallise large gains and the circumstances make this possible or advisable, it may be worth making them in this tax year rather than waiting for future tax years where the capital gains tax rates may be higher.

If you have not done so already, you may also wish to review your Business Asset Disposal Relief position, particularly in the light of reductions in the lifetime limit, the most recent being in 2020. These rules have cumulatively changed in recent years and further changes cannot be ruled out. 

Finally, if you have more than one home, consider your Private Residence Relief position and whether an election is needed.

Charitable donations

If you make a charitable cash donation within the scope of a Gift Aid election in the UK, you can obtain Income Tax relief at your marginal rate on the grossed-up amount of the gift. This covers UK registered charities and certain overseas charitable organisations. Correspondingly, the charity can reclaim the tax equivalent of 25% of the cash gift. 

For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. Provided you pay at least £25 of tax, the charity reclaims £25 (20% of £125) from HMRC. You would also benefit by £25, by virtue of paying tax at 20% instead of 40% on the grossed-up donation of £125.

If you’re an additional rate taxpayer (whose marginal rate is 45%), you would get enhanced relief of £31.25, i.e., 25% of £125, in the above scenario.  

You can donate assets other than cash to charity, such as land or shares. In this case, the market value of the land or shares donated to charity is deductible from your general income, providing relief of up to 45%.

What should you do?

Consider whether you wish to make any further charitable donations in 2021/22 before the end of the tax year. As mentioned earlier, this may assist with bringing your taxable income down below the “60%” band of income between £100,000 and £125,140. If you’re planning on making large charitable donations, consider whether it would be beneficial to do so in the current tax year or to wait until the start of 2022/23. This may be particularly relevant if, for example, you are considering making larger donations of land and shares and would benefit from a higher rate of tax relief in 2022/23. You should also bear in mind that you need to have paid enough tax to frank the 25% claimed back by charities using Gift Aid, or else your tax liability increases to match that amount.

Pension contributions

When you make a contribution to your UK personal pension (other than via salary sacrifice), you can be eligible for tax relief at your marginal rate. As with donations made under Gift Aid, your basic and higher rate tax bands are extended by the grossed up pension contribution so that you obtain tax relief at your marginal rate. Relief is limited to the lower of your annual earnings and the annual allowance. 

The standard annual allowance for gross pension contributions is £40,000 gross, subject to the level of your income. Between 2016/17 and 2019/20 for those with income in excess of £150,000, the annual allowance was tapered down to a minimum of £10,000 (gross) by £1 for every £2 of adjusted income in excess of £150,000. From 2020/21, the income threshold at which the annual allowance began to be tapered was raised to £240,000 and the minimum annual allowance reduced to £4,000. Pension contributions in excess of the annual allowance are subject to the annual allowance charge, which effectively claws back the marginal rate tax relief.

One important thing to note, is that you can carry over any unused annual allowance from the three previous tax years as long as you were a member of a pension scheme in those years. 

What should you do?

Consider whether you wish to make any further pension contributions in 2021/22, in particular and where appropriate, ensuring that you do not lose previous years allowances. In 2021/22, unused allowances from 2018/19 to 2020/21 can be utilised and any unused allowance for 2018/19 will be lost if it is not utilised before 5 April 2022. You should also consider lifetime allowances, which the Chancellor announced in 2021 would be frozen at £1,073,100 for the rest of this parliament.

In addition, if you are a high earner, you may find that you are restricted to put more than relatively modest amounts in your pension before you are subject to the annual allowance charge, depending on how much unused allowance you have from previous years. If you are employed, this includes employer and personal pension contributions. This is a complicated area, and you should ensure you obtain professional advice if you are in any doubt.

Tax-efficient investments

There are a number of tax-efficient investments you may wish to consider in order to reduce your tax liability.

The first and most obvious is an Individual Savings Account (ISA). The annual overall subscription limit for an ISA for 2021/22 remains at £20,000 with no provision to carry-forward unused allowance into later years. ISAs can be invested in cash or certain investments such as stocks and shares. ISAs are available to all UK resident individuals aged 18 or over. There are also Junior ISAs available for those under 18 with an annual limit of £9,000. The main benefit of ISAs is that Income Tax and Capital Gains Tax do not apply.

Those wishing to invest in start-up companies may also consider the following investment vehicles:

Enterprise Investment Scheme (EIS)

It’s possible to invest up to £2million in EIS, provided anything over £1million is invested in ‘knowledge-intensive’ companies. These are companies that carried out research, development or innovation at the time they issued, or are issuing shares. You receive an Income Tax deduction of up to 30% of the EIS investment and have the option to defer capital gains on assets disposed within a certain timeframe, equal to the amount invested.

Seed Enterprise Investment Scheme (SEIS)

You can invest up to £100,000 in the year and receive an Income Tax reduction of 50%, potentially wiping £50,000 off your income tax bill. Furthermore, you can claim to treat 50% of a capital gain as exempt from Capital Gains Tax (CGT) in the year you make the SEIS investment (i.e., a gain of up to £50,000).

Venture Capital Trust (VCT)

A VCT might be suitable for you if you are prepared to invest in higher risk funds. You can invest up to £200,000 in a year and receive an Income Tax reduction of 30%. However, unlike EIS or SEIS, there is no scope to carry back the subscription to the previous tax year.

What should you do?

Consider maximising your ISA allowance for the year if you have not already done so.

If you are interested in making investments in EIS, SEIS and VCTs, consider whether one prior to 5 April 2022 would be appropriate. It’s also possible to carry back any EIS/SEIS subscriptions made in the current tax year to 2020/21, providing the EIS/SEIS limit has not been exceeded in that year. As the 2020/21 Self-Assessment filing and payment deadline has now passed, this should generate a tax repayment.

If you’re in a position to consider deferring capital gains on assets disposed of, you may wish to consider whether a deferral would be appropriate now and risk a higher CGT rate when the gain recrystallizes in a future tax year.

Inheritance Tax (IHT)

There are a number of reliefs and exemptions for IHT to consider each year, which could reduce the amount of IHT that your estate pays on your death. The main allowances are:

Annual exemptions: Up to £3,000 can be given away each tax year and, if unused in a year, that amount can be carried forward for one year and utilised in the next.

Small gifts exemption: You can give up to £250 to as many people as you wish each tax year.

Gifts out of income: If your income regularly exceeds your expenditure, you can give away the excess if part of a settled pattern. 

What should you do?

Consider whether you have utilised all the potential IHT reliefs and exemptions, particularly the exemptions which are available on an annual basis, subject to the one year carry forward provision. You may also wish to consider whether it is appropriate to obtain a review of your estate and Inheritance Tax position, as there may be further opportunities to reduce your likely IHT exposure.

Speak to an expert
Speak to an expert

We recommend that you seek professional advice where appropriate before taking any action. Fill out the form below and one of our UK tax experts will be in touch to provide you with more information on the above, or specialist advice tailored to your unique circumstances.

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