Pre-Budget year-end planning 2020/21 – seven key areas to consider
The Chancellor, Rishi Sunak is due to deliver the Budget to Parliament on Wednesday 3rd March, with many in the industry predicting possible tax rises to help rebuild the economy.
We will be issuing a Budget commentary shortly after the announcement, along with our latest reactions and insights. To help you prepare, we have also put together a quick guide of seven key points to consider as part of your pre-Budget planning.
Please contact your Financial Planner if you would like to discuss pre-Budget planning in more detail.
1. Income tax saving opportunities
If you are in a couple, switching income from one spouse or partner to the other can help save tax, which may be even more important this year. Always aim to use both individuals’ personal allowances and minimise any higher and additional or top rate tax. Reorganising your shareholdings between you may make better use of your individual dividends allowance limits. If you have children, or live with someone with children, and one of you has income of £50,000 or more, the high-income child benefit charge effectively reduces the benefit on income between £50,000 and £60,000. Reducing income levels by making a pension or charitable contribution could help.
2. Getting ahead on capital gains
Capital gains tax (CGT) is already in the spotlight for change in next month’s Budget, so should be a key focus for 2020/21. You should generally aim to use your annual exempt amount by making disposals before 6 April 2021. If you have already made gains above the annual limit in this tax year, you might be able to dispose of loss-making investments to create a tax loss. Transferring assets between married couples or civil partners before disposal might save CGT, particularly where one partner has an unused exempt amount, has not fully used their basic rate tax band or has capital losses available. You should generally leave as much time as possible between the transfer and the disposal.
3. Directors, employees and the self-employed
Bringing forward income could be a sensible approach if you think you could end up paying more tax at higher rates in 2021/22. Bringing forward a dividend payment could also help if the income falls into the basic rate band this year (or Scottish starter, basic or intermediate rate bands), or if you expect to pay tax at the additional or top rate next year but only at the higher rates this year. The tax planning approach around income levels applies equally if you are self-employed. When calculating your trading profit for 2020/21, however, you must include any Coronavirus support payments because these are all taxable.
4. Pensions planning
The Coronavirus crisis might have affected your pension savings, especially as stock markets continue to react to the rollercoaster of restrictions, lockdowns and vaccine trials. With the possibility of reduced tax relief for pension contributions from the next tax year, you might want to maximise your pension contributions for 2020/21 by making further contributions by 5 April 2021. This could be a good use of any lockdown savings. You can carry forward unused annual allowances for up to three years to offset against a contribution of more than the annual limit. If you are drawing on pension savings, or close to it, bear in mind the effects of the last year on your pension pot and take advice before accessing your pension.
5. Tax-efficient investments
Some investments have income tax and CGT advantages. You can invest in one cash ISA, one stocks and shares ISA and one innovative finance ISA in each tax year. ISAs are free of UK tax on investment income and capital gains. A lifetime ISA is available for those aged 18 to 39. However, the maximum investment limit applies across all four types of ISA. Enterprise Investment Schemes and Venture Capital Trusts are schemes that offer significant income tax and CGT benefits. However, they are high-risk investments and may be difficult to sell so you should take specialist advice.
6. Inheritance tax planning
Inheritance tax (IHT) planning is generally not related to the tax year end, although this is as good a time as any to review your Will and ensure your stated wishes are up to date. Gifts totalling up to £3,000 in a tax year are exempt from IHT. If you did not use this exemption in the previous tax year, you can make IHT-free gifts of up to £6,000 before 6 April 2021. If you have already used your exemption for 2020/21, you could delay your next gift to take advantage of the next tax year’s exemption.
7. Charitable giving
In this particularly difficult year for many, remember you can get tax relief for any gifts to charity if you make a Gift Aid declaration. You make the gift out of your taxed income and the charity benefits by claiming back basic rate tax on the value of the gift. You can obtain both income tax and CGT relief on gifts to charities of shares listed on the stock market and certain other investments.