Time to take advantage of tax-efficient allowances

With the end of the tax year (5 April 2022) fast approaching, now is the opportune time to ensure you have fully utilised any tax breaks available and to ensure your financial affairs are in order as we head into the 2022-23 tax year.

End of tax year planning opportunities

Here’s a reminder of some of the end of tax year planning opportunities you should consider taking advantage of:

Pensions

The Annual Allowance for contributions to benefit from tax relief is currently £40,000, or 100% of your earnings, whichever is lower. However, you can carry forward unused allowances from the past three years, provided you were a pension scheme member during those years. For every £2 of adjusted income (total taxable income including all pension contributions) over £240,000, an individual’s Annual Allowance is reduced by £1 (the minimum reduced Annual Allowance is £4,000).

There is also a Lifetime Allowance which limits the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100.

Don’t forget that you can also invest into a pension for a non-working or non-tax-paying spouse or civil partner; doing so has the additional advantage of allowing them to use their personal tax allowance in retirement. Similarly, you can pay into a pension for children under 18. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, amounts to £3,600 a year.

Individual Savings Account (ISA)

The ISA allowance is £20,000 for 2021-22, which can be invested in either a cash ISA, a stocks and shares ISA, an Innovative Finance ISA or a combination. You can’t carry over your ISA allowance into the new tax year.

Junior ISAs

Junior ISAs can be opened for any child under 18 living in the UK; the maximum investment is £9,000 per child.

Gifting for Inheritance Tax (IHT) purposes

Gifts of up to £3,000 each tax year are exempt from IHT; any unused part of the £3,000 exemption can be carried forward to the following year.

Smaller gifts can also be made; wedding gifts of up to £5,000 for a child, £2,500 for a grandchild (or great grandchild) and £1,000 to anyone else. Individual gifts worth up to £250 are also IHT free.

Capital Gains Tax (CGT)

The annual CGT exemption is £12,300 (£6,150 for trusts) and as you can’t carry this forward, you may want to crystallise gains or offset capital losses before the end of the tax year.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

Venture Capital Trusts (VCTs)

VCTs offer growth potential by investing in smaller VCT-qualifying companies that are not listed on the main London Stock Exchange. For 2021-22 the maximum investment into VCTs is £200,000.

VCTs provide a number of tax incentives including:

  • 30% upfront Income Tax relief, provided you hold the VCT for five years
  • No CGT on profits
  • Tax-free dividends

Enterprise Investment Schemes (EISs)

For this tax year, the maximum investment in EISs is £1 million (or £2 million as long as at least £1 million of this is invested in knowledge-intensive companies). Tax incentives are a feature of EISs and include:

  • 30% upfront Income Tax relief, provided you hold the EIS for three years
  • No CGT on profits after three years
  • No IHT after two years

In recent years, both EISs and VCTs have gained significant popularity amongst wealthier investors and both schemes undoubtedly remain an attractive proposition for experienced investors looking to maximise tax-efficiency and diversify their portfolios.

Both EISs and VCTs are high risk investments. This enhanced risk element stems from the fact that EISs and VCTs invest in small, fledgling, and therefore typically fragile enterprises.  There may be no market for the shares should you wish to sell them and it could therefore be difficult to make a disposal.  You may lose all your capital.

Please contact us if you have any questions or want to discuss any aspect of your end of year tax planning. We look forward to hearing from you, click here to contact us.

Free guide

We have produced an end of tax year guide which highlights your main tax planning opportunities for the 2021–22 tax year, click here to download it. We have also written a version with a particular focus on financial advice for barristers and members of the judiciary. You can download a copy by clicking here.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

FREE guide

Download our free end of tax year guide by clicking here. We’ve written a special version for barristers, click here to download it.