As the end of the tax year fast approaches, Kevin Sefton, CEO of untied, the personal tax app, sets out the 10 steps to ensure you reduce your tax liability
While the last twelve months have been very hard, many people have been able to continue to earn and found themselves spending less. It’s time to put that to good use. You can reduce your tax bill, help others by giving to charity, and build your own financial future with tax-wise ISA and pension investments.
Up to 30 million people can reduce their taxes by taking these simple steps before the tax year ends on 5 April 2021. Because of the way the tax rates change, someone on a salary of £100,000 to £125,000 may be paying tax at 62%. For someone in this position, a £2,500 pension contribution could only cost £1,000 because of the tax being saved. So, it really pays to be making the most of what is on offer before the clock ticks over to a new tax year on 6 April 2021.
Five things to do now to reduce your tax bill:
- donate to charity;
- use your ISA allowance;
- pay into your pension;
- make any back claims you may have missed;
- if you’re making big capital gains, think how you can use your allowance;
- make arrangements to pay any tax for 2019/20; and
- withdraw money from your Lifetime ISA if you need the cash.
Here are the top 10 tips on easy wins to reduce tax liability:
- Make a donation to charity
Donating to charity helps a good cause – but it can also help reduce your tax bill. If you’re a UK taxpayer, Gift Aid allows charities to claim the basic rate of tax of 20% on your donation. This means that a £1 donation is worth £1.25 to the charity. If you’re a higher rate taxpayer, you can also claim back the difference between higher rate and basic rate tax on the value of your donation. For a 40% rate taxpayer, that means for every £1 you donate, you can claim back 25p in tax relief.
- If you haven’t used all your ISA allowance
ISAs are tax-efficient savings and investment accounts. You can use them to save cash or invest in stocks and shares. You pay no income tax on the interest or dividends you receive from them and any profits from ISA investments are free of capital gains tax. For the 2020-21 tax year, everyone has an ISA allowance of £20,000 – if you don’t use your annual ISA allowance before the end of each tax year, you’ll lose it – and it will start anew on 6 April. The tax year end falls over Easter weekend this year so check when your provider’s ISA payment deadline is as it may be as soon as Thursday 1 April.
- If you want to take advantage of the Lifetime ISA
A Lifetime ISA (LISA) is a tax-free savings or investment account designed to help those aged 18-39 buy their first home or save for retirement. You can pay up to £4,000 into it per tax year and you’ll earn an extra 25% (up to £1,000) top up from the government. Any payment sits within your overall ISA limit of £20,000 for 2020-21. If you haven’t paid/invested the full amount into your LISA and still wish to, or indeed wish to open up a LISA before the end of the tax year to take advantage of the state cash bonus, you have limited time to do so.
Previously, you were charged a 25% penalty on anything withdrawn from a LISA if you took the cash out before you turned 60, or if you weren’t using it to buy a property. If you have money in a LISA that you want to withdraw there is currently a reduced penalty of 20% due to the covid pandemic. However, this only applies if you complete the withdrawal from your LISA by 5 April 2021. Withdrawals for non-qualifying purposes after 6 April 2021 will be subject to the 25% penalty again.
- If you want to claim tax relief on pension payments
Pensions are a tax-efficient way of saving for your future retirement because you get a top-up equal to basic rate tax relief of 20% on anything you pay into a pension. If you pay £80 into your pension, the government will add an extra £20, making a total amount of £100 that goes into your pension pot. If you pay tax at higher or additional rates, you’ll also be entitled to further tax relief on your contributions. You can save into more than one pension scheme at a time.
There are many different types of pension, including workplace pension schemes, stakeholder pensions, personal pensions and Self-Invested Personal Pensions (SIPPs) – which allow you to make your own investment decisions on how your pension pot is invested. You get tax relief on up to 100% of your annual earnings, up to a limit of £40,000 or lower if your income is over £240,000. In the past, there have been rumours about the government looking at the possibility of reducing tax reliefs available for pension contributions. However, nothing changed in this year’s Budget.
- If you think you overpaid tax before 5 April 2017
There is a four-year time limit for claiming tax back. So, if you think you overpaid tax in the year to 5 April 2017 you must make a claim to HMRC by 5 April 2021. Therefore, if you think you’re entitled to any additional employment expenses from that year, or you want to apply for the marriage allowance, or if you received a PPI pay-out in that year, on which tax would have been deducted from the interest element, then you need to make a claim quickly! You can make these claims on the HMRC gov.uk website:
- apply for the Marriage Allowance;
- claim a refund of tax deducted from interest (R40); and
- claim for employment expenses (P87).
If you want to claim for these things for the years after 2017 then there’s not such a rush as you have more time to do this.
- If you want to maximise your capital gains allowance
Most individuals who live in the UK are entitled to a special annual tax-free capital gains allowance, known as the Annual Exempt Amount or AEA. This can be used to cover gains made on things like property (other than your main home which is normally exempt), cryptocurrencies, shares not held in an ISA and certain personal possessions. The AEA for 2020/21 is £12,300. You only have to worry about capital gains tax when you sell these things, and only if you made a profit. If your total profits after costs is less than the AEA then you don’t have to pay any capital gains tax.
It can therefore make sense to think ahead if you intend disposing of an asset in the near future which is holding a profit. If this asset can be split into batches, like shares can, you could consider selling parts either side of the end of the tax year then you could benefit from two lots of AEA. However, this can be a risky strategy as the asset could reduce in value during this time, so you’ll need to think carefully about the potential risks involved if this is something that you think could benefit you.
Be careful if you intend buying back the asset, though. HMRC stopped the practice of ‘bed and breakfasting’ some years back and investors now have to wait 30 days before repurchasing any shares or other securities they’ve previously sold.
- If you have income over £50,000 and received Child Benefit
If your total income has exceeded £50,000 for this tax year and you or your partner received Child Benefit, you’ll be liable for the High-Income Child Benefit Charge. This is because the benefit is clawed back if your income goes over the £50,000 threshold. However, you can potentially avoid or reduce this charge by making certain additional payments to a pension before the tax year ends, or by making donations to charity through Gift Aid.
HMRC allows you to deduct the gross amount of these payments from your income before applying the charge. So, if you contribute enough to get your income below £50,000, you’ll completely avoid this charge, meaning you retain the full value of any Child Benefit received. You’ll also get the added bonus of receiving tax relief on your pension contributions.
- If you have income over £100,000
A similar thing happens to those earning over £100,000 who are effectively paying a marginal tax rate of 60% on income up to £125,000, because personal allowances are withdrawn at this level. You can help to mitigate this by making payments to charity, or by making additional pension contributions before the tax year ends.
If you’re lucky enough to be receiving a bonus at the end of the tax year which pushes you over the £100,000 threshold, you might also want to explore the possibility of bonus or salary sacrifice options with your employer. This could result in some, or all of the payment being paid directly into your pension, or some other non-cash benefit, in order to keep your income below £100,000.
- If you owe money to HMRC
If you owe money to HMRC for the 2019/20 tax year, HMRC has said that no-one will incur a late payment penalty if they get in touch by 1 April. They have also said they are willing to consider spreading payment of self-assessment tax bills until January 2022. You can apply to set up a payment plan on the HMRC website if you owe less than £30,000 and your tax returns are up to date. We’d therefore urge anyone struggling with payment to reach out to HMRC before 1 April 2021, in order to avoid the possibility of a further 5% penalty being added.
- If you still haven’t sent in your 2019/20 tax return
HMRC has said that they will not discuss time to pay arrangements with anyone who doesn’t have their tax returns up to date and further late filing penalties will become due if the return is still not submitted after three months. If you needed to send in a 2019/20 tax return and you haven’t done this, we’d urge you to do this as soon as possible.