Tax year end planning 2020 checklist

The 2019/20 tax year officially ends on 5th April 2020. We have prepared this handy top 10 tax year end planning checklist to help you to make the most of your tax reliefs and allowances to support your savings.

You can also download our free ‘Financial Guide to Tax Year End 19/20’ below.

1. Use your full ISA allowance

The savings in an Individual Savings Account (ISA) are protected from UK income tax or capital gains tax, so they are very tax efficient. There is no need to declare these savings on your self-assessment tax return.

You can save up to £20,000 in the 19/20 tax year, so the time leading up to tax year end is often referred to as ‘ISA season’ and is the last chance to ‘top up’ your savings to this amount. Any savings added to your ISA after 6 April 2020 will go into your new 20/21 tax allowance, as the shortfall cannot be carried over.

ISAs enable you to invest for the long term but with the peace of mind to take money out if you need to. Be aware that some ISAs will not allow you to replace the amount withdrawn within the same tax year if your full ISA allowance has been reached. You can often transfer savings from previous ISAs with other providers, into a new ISA.

Cash ISAs with fixed or variable rates and ISAs which invest in stocks and shares are available, as long as your combined savings amount in ISAs in this tax year does not exceed £20,000.

2. Utilise personal pension tax relief

Tax relief is one of the main advantages to using a pension to save for your retirement. The government will add basic rate (currently 20%) tax relief when you contribute into a personal pension up to £40,000, the current annual allowance.

For instance, to contribute £10,000, you put £8,000 into your pension and the government adds £2,000. You qualify for basic rate tax relief if you’re a UK tax payer under 75.

If you are a higher rate or additional taxpayer, you could get extra tax relief on top of the basic rate amount. Higher rate taxpayers (paying 40% tax) can claim up to a further 20% through their tax return. Additional taxpayers (paying 45% tax) can claim up to a further 25% through their tax return.

The ‘Carry Forward’ rule can also let you take advantage of any unused allowance from the three previous tax years.

This can help:

• people earning more than £40,000 in the 2019/20 tax year who wish to maximise pension contributions;
•  people with an irregular earnings pattern who want to make a large pension contribution in a good year; and
• employers wanting to make large contributions.

If your adjusted income is more than £150,000 your annual allowance will be ‘tapered’. ‘Adjusted income’ is your total taxable income after any reliefs, plus any employer pension contributions. The ‘Carry Forward’ rule is still possible.

3. Allowances and child benefit

Pension contributions reduce an individual’s taxable income. In turn, this can have a positive effect on both the personal allowance and child benefit for higher earners resulting in a lower tax bill. An individual pension contribution that reduces income to below £100,000 will restore your full tax-free personal allowance. The effective rate of tax relief on the contribution could be as much as 60%.

Child Benefit is clawed back by a tax charge if the highest earning individual in the household has income of more than £50,000. It is cancelled altogether once their income exceeds £60,000. A pension contribution will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.

Eligible married couples and those in civil partnerships can transfer up to £1,250 of personal allowance (10% of the £12,500 personal allowance for 2019/20) to their partner under the Marriage Allowance. This applies if one of you earns less than the personal allowance, so is not liable to tax, and the other partner is a basic tax payer. You can apply for Marriage Allowance on the HMRC website.

4. Reduce your inheritance tax bill

Inheritance Tax (IHT) is paid by the people who inherit your estate after your death. The rate is 40% for estates worth more than £325,000.

The first £325,000 of everyone’s estate is tax-free, known as the standard nil rate tax band.
In addition, a resident nil rate tax band (RNRB) was introduced from 6th April 2017. In short, this means you can pass on up to £1million to linear descendants such as a child or grandchild, through your family home.

One way of avoiding your family paying IHT on your estate is to give it away when you are still alive. However, the giver must survive for 7 years after the gift, depending on circumstances.

5. Business Owners: Take profits as pension contributions

For many directors, taking significant profits as pension contributions could be the most efficient way of paying themselves and cutting their overall tax bill. There’s no National Insurance (NI) payable on either dividends or pension contributions.

Dividends are paid from profits after corporation tax and will also be taxable in the director’s hands. By making an employer pension contribution, tax and NI savings can boost a director’s pension fund. The employer can also benefit from corporation tax relief.

6. Special Investments & Tax Incentives

Business owners have long benefited from Inheritance Tax (IHT) savings and now private investors can too with ‘Business Property Relief’ (BPR). This is one of several tax incentives available to support investment into small UK companies.

Unlike gifts and Trust arrangements which usually only achieve IHT savings after 7 years, a BPR investment is effective after just 2 years.

Investments that qualify for BPR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

7. Exploit your Capital Gains Tax Annual Exemption

The ‘Capital Gains Tax’ (CGT) annual exempt amount is the amount of gains that you are allowed to make before paying tax on those profits. The annual exempt amount is £12,000 for individuals and personal representatives and £6,000 for trustees of settlements, for the 2019/2020 tax year.

If you are looking to supplement your income tax efficiently, you could withdraw funds from an investment portfolio and keep the gains within their annual exemption.

Even if cash isn’t needed, taking profits within the £12,000 CGT allowance and re-investing the proceeds, possibly via an ISA, means there will be less tax to pay when you eventually need to access these funds to meet spending plans.

If there is tax to pay on gains at the higher 20% rate, a pension contribution could be enough to reduce this rate to the basic rate of 10%.

8. Bonus/Employer Pension Contributions

Thanks to Automatic Enrolment, employees are enrolled into a workplace pension by their employer. Employees and their employer will pay into the scheme and may also get tax relief from the Government.

You may have previously joined a defined contribution or personal pension by your employer.
‘Exchanging’ a bonus for an additional employer pension contribution before the tax year end can bring several benefits. The employer and employee National Insurance savings made could be used to boost pension funding. This would give more in the pension pot for every £1 lost from take-home pay.

In order to obtain tax relief on the bonus payment, the ‘salary sacrifice’ rules need to be followed.

9. Boost Family Wealth

You can also pay up to £3,600 into the Personal Pension Plan of a non-tax payer such as a non-working spouse or a child under the age of 18.

As with your own pension, you would be entitled to pension tax relief on any contributions made. This means you would only need to contribute £2,880 of your own money to reach the £3,600 annual limit, as the government would add the extra £720.

10. Make a Charitable Donation

Charitable donations are generally tax free. Those made through Gift Aid entitle the charity to an extra 25p for every £1 you give. This doesn’t cost you extra, Gift Aid assumes that the money has been already been taxed at the standard rate.

Do make use of these ten tips in your tax year end planning.

Effective tax year end planning is a year round job, but it’s only at the end of the tax year that you have the view to put your plans in place. Do act soon to meet the 5 April deadline. Tax rules may change in the future, and the value of tax reliefs depends on your own personal circumstances.

Download our free ‘Financial Guide to Tax Year End’ below or call our experts on 01244 347583 to arrange a free one hour consultation. Please note that we will send you the guide via email. We will not send you anything further unless you give us permission to do so.

*Please note that the information in this Tax Year End Planning Checklist article and in our free guide is for informational purposes only. It should not be taken as advice. You should contact an Independent Financial Adviser to discuss your personal circumstances before taking action.