Year-end planning: Taking advantage of any remaining reliefs, allowances and exemptions

Personal Allowance

The personal allowance for the 2020/21 tax year is £12,500 which is available to all individuals whose income is less than £100,000 in the tax year. The allowance cannot be carried forward, so it is important to utilise this where possible.

If your income is in excess of £100,000, the personal allowance is reduced by £1 for every £2 of income received until the personal allowance is reduced to nil once income exceeds £125,000.

Dividend Allowance

The first £2,000 of dividend income received in the tax year is tax free.

Dividends received over and above the £2,000 tax free rate are subject to their own tax rate bands:

Savings Income

For basic rate taxpayers there is a savings nil rate band of £1,000, meaning that the first £1,000 of savings income (other than dividends) is tax free. The savings nil rate band is not transferable between spouses, so it is important to ensure that bank accounts are held to maximise the nil rate band. Higher rate taxpayers have a savings nil rate band of £500.

National Insurance Contributions

Check whether you are you paying enough National Insurance contributions (NIC) to get a qualifying year in order to be entitled to your state pension. You can pay a salary of up £8,788 for 2020/21 to contribute to your NIC without incurring any employer or employee Class 1 NIC charges.

You may also be paying too much NIC if you are employed and self-employed, or have more than one employment, so it is important to check your contributions.

Annual Pension Allowance

The pension contributions annual allowance is £40,000 per year, with maximum contribution being the higher of either £3,600 or relevant earnings (this excludes investment income such as rental income, dividends, interest).

Personal contributions extend your tax rate bands by the gross amount of your pension contribution, but this is only effective if you’re a higher rate taxpayer. Pension contributions through salary sacrifice may be more tax effective for basic rate taxpayers and for employers.

Individuals with an adjusted income of over £240,000 are at risk of their annual allowance being tapered down to a minimum allowance of £4,000, which could result in potential tax charges for excess pension contributions. Personal, employee and employer contributions count towards the annual allowance, not just personal and employee contributions.

Trading and Property Allowance

If you have trading income from self-employment or providing casual services (such as babysitting and gardening) with minimal expenses, you can use the £1,000 trading allowance to reduce your potential tax liability.

If you have rental income from land or property with minimal expenses, you can use the £1,000 property allowance to reduce your potential tax liability.

If you have both types of income, you will get a £1,000 annual allowance for each.

Property Income

The restriction on relief available for finance costs (including mortgage interest) associated with residential property was phased in over 4 years from April 2017, and is now complete.

This means landlords can no longer deduct finance costs from their profits, and can instead claim the basic-rate tax deduction on 100% of the costs.

The basic-rate deduction is up to 20% of the disallowed finance costs.

The restriction does not apply to the renting of commercial properties, furnished holiday lets or to companies letting residential properties.

Capital Gains Tax Annual Exemption

You only have to pay CGT on your overall gains above the annual exempt amount, which is currently £12,300 for individuals. This annual exemption cannot be carried forward so will be lost if not used.

If you are considering selling a residential property, CGT returns will need submitting and the CGT liability paying within 30 days of the date of completion so it is vital to ensure that you gather information ahead of time ready to be able to comply with this tight deadline.

The period of deemed qualifying occupation for principle private residence relief has been reduced from the final 18 months to the final 9 months of ownership for property disposals where the property has at some point been the seller’s main residence.

Lettings relief was abolished from April 2020 except in circumstances where the seller lived in the property with the tenants.

Inheritance Tax Annual Exemption

Gifts of up to £3,000 per year can be made on an IHT free basis so you should consider making gifts to utilise the annual allowances ahead of the end of the tax year. This limit increases to £6,000 if the previous year’s annual exemption has not been used. A married couple can therefore make an IHT exempt gift of up to £12,000 if exemptions for previous years have not been utilised.

In addition, there is a small gifts allowance of £250, which allows gifts of up to £250 to be made without IHT consequences. The £250 limit is per recipient per tax year.

Tax Efficient Investments

There are various tax efficient investment opportunities which can help minimise your tax liabilities throughout the financial year, including:

Some tax efficient investments have a higher risk than others, so it is important that any investments match your personal circumstances.