It might seem obvious, but these few weeks represent the last chance to tweak what goes into next year’s tax return and take advantage of tax breaks. As for your taxable income, there will always be elements that you cannot control – a salary or pension, for example – but some aspects can be managed so that you can use the allowances available.
Don’t forget the dividend allowance
The dividend allowance of £2,000 often goes unused. Many of us hold a portfolio of stocks and funds within an ISA where the dividends are tax free anyway. However, if you have your own company and that company has distributable reserves and cash, then you could take a dividend prior to the year end. Use the £2,000 dividend allowance to shelter it and take the opportunity to collect spendable cash without a tax charge.
If you’ve used the dividend allowance, remember the 2021/22 tax year is the last opportunity to take dividends before the additional NIC charge is introduced from 6 April 2022. If you’re a basic rate taxpayer, dividends are taxed at 7.5% in 2021/22, increasing to 8.75% in 2022/23. The rate will go up for higher and additional rate taxpayers too, from 32.5% and 38.1% to 33.75% and 39.35% respectively. Whatever your tax status, a dividend paid now is therefore an opportunity to save 1.25%. It might even be worth taking more than you need immediately to bank current rates of tax on next year’s income.
Maximise your pension contributions
Pension contributions are another key element in managing your tax liability. Offering relief on entry, gross roll-up of income, 25% tax free on extraction and IHT protection, anyone who can contribute to a registered pension should not pass up the chance to do so. The contribution limit is capped at the lower of £40,000 or your earned income, although high earners may be subject to a reduced or tapered allowance. If your income is £100,000–£125,000, a pension contribution can take it below £100,000 so you keep your personal allowance too.
The pension contribution position is complicated by the ability to carry forward unused contribution allowances. You can only look back to the last three years, which means that any unused relief for 2018/19 will be lost after 5 April. You must have been a member of the scheme throughout and you can only access the old capacity when you’ve used up this year’s allowances. It won’t be feasible for everyone but can really boost your tax savings. You make the contribution net of basic rate tax, which is reclaimed by your fund administrator, but you’ll need to declare the contribution on a self-assessment return in order to get the higher rate relief.
Remember your ISA and your CGT allowance
Other tax breaks that can be used within the tax year are ISAs (including Lifetime ISAs and Junior ISAs). ISAs are funded out of taxed income, but once the money is ISA-wrapped, the income and gains will be tax free. A single year’s contribution probably won’t fund your retirement, but over time regular contributions will build a pot generating tax-free income as part of a retirement plan.
The capital gains tax allowance will also be lost if not used within a tax year, so consider selling stocks standing at a gain. You cannot repurchase the same stock the next day as the capital gains tax rules match the sale with any purchases of the same stock in the subsequent 30 days. This means you will neither use the CGT allowance nor get an uplifted base cost. However, you can sell from your investment account and purchase in your ISA or via your spouse.
As 5 April approaches, investment houses will have no shortage of opportunities in search of investors. Such investments put money into fledgling and unquoted businesses and so the tax breaks need to be considered in the context of the elevated risk.
Important information: Tax laws are subject to change and taxation will vary depending on individual circumstances Investments can go up and down in value and you may not get back the full amount originally invested.