On the threshold of a new year, it’s always worth looking back to see what lessons we can take from the one that’s just ended.
Well, if 2020 taught us one thing, it’s that you never really know what’s just around the corner.
However, some things always stay the same. As Benjamin Franklin said: “In this world nothing can be said to be certain, except death and taxes.’’
So, at Reeves, as we do every year, we’re launching our end of year tax planning campaign to remind our clients of the importance of making the best use of available tax allowances before the end of the tax year on April 5.
This can make an enormous difference to the value of your retirement savings. Tax planning is one of the most significant steps you can take to boost your savings and it’s also one of the easiest - and it’s risk free.
This year, it could be especially important. Thanks to the Covid pandemic, the government has had to spend eye-watering sums of money and this has resulted in our national debt topping £2 trillion.
At some point, the books will have to be balanced and that will probably mean tax rises, which could well come in the form of reduced allowances. There have already been suggestions of dropping the annual tax free amount for Capital Gains Tax to as little as £1,000, and double-taxing heirs on both CGT and Inheritance Tax. There is also speculation on the removal or reduction of relief on pension contributions by higher rate tax payers.
So, depending on individual circumstances, this year could be the time to take full advantage of the available allowances while you still can.
Personal contributions to your pension fund are limited to the amount of your annual salary, to a maximum of £40,000. A non tax payer or basic rate tax payer will have 20% added to the pension in tax relief and a higher rate tax payer will get the 20% relief and can claim back another 20%. An additional rate tax payer, can claim back 25%, in addition to the 20% added to the pension.
Employer contributions – which you can make if you are self-employed and have your own limited company – aren’t restricted by the salary limit, but are still limited to the annual allowance and there are carry forward rules. Even if you no longer have any earnings, you can still contribute £2,880, to which the taxman will add £720 in relief.
Also, if you haven’t used your allowances for up to the previous three years, this is your last chance to take advantage of them. If you haven’t paid in anything this year, or for the previous three years, you could pay in up to £160,000. This means that if you make a contribution of £128,000, the taxman will top it up with another £32,000.
You also have a personal annual ISA allowance of £20,000. Within the shelter of an ISA, any dividends, interest or capital growth are income tax and capital gains tax free.
Nor should you forget your personal income tax allowance of £12,500. If you’re drawing down your pension, make sure you have made full use of this year’s allowance and – as with all allowances – don’t forget to ensure your spouse makes full use of their allowance too.
The tax year ends on April 5, but don’t leave it until then to take advantage of these allowances. At Reeves, we will be happy to advise you, but do try to get in touch with us before March 19.
Meanwhile, as part of our end of year tax planning campaign, we will be holding the following webinars in the New Year.
- End of tax year planning for directors of own company, hosted by Jack Ford - January 12th at 6:30pm and Sunday 17th at 6:30pm;
- End of tax year planning for employees, hosted by Ollie Gibbs – January 26th at 6:30pm and Sunday 31st at 6:30pm;
- End of tax year planning for the retired, hosted by Chris Lockerbie – February 9th at 6:30pm and Sunday 14th at 6:30pm.