Year-end tax planning


We are already coming towards the end of the tax year (5 April 2021). The 2020/21 tax year has been a period where many businesses have been affected by Coronavirus and employees working from home throughout. 

Despite Coronavirus income (including grant income) and capital gains have been generated in the period and taxes paid. But there are a few annual limits which you need to use or planning you might want to make to reduce your taxes for the year.

Here are some top tips:

Avoid income levels which have higher rates

Sounds simple and usually you might imagine the tax rate increases the more income you have but the tax system has a couple of major kinks which you should really look to avoid.

  • Between £50,000 - £60,000 if someone in your household is claiming child benefit as the effective rate of tax for this is 58.2% if you are claiming for 2 children
  • Between £100,000 - £125,000, the personal allowance is withdrawn at this level of the effective rate of tax in this band is 60%

Review your pension arrangements.

There are limits on the level of pension contributions you can make each year. There is a limited ability to carry forward relief from earlier years but any pension relief unused from the 2017/18 tax year will be lost if extra pension contributions are not made before 5 April 2021.

Consider whether it is time to change how you run your business. 

  • It is time to incorporate and run your business as a Limited company, go into partnership or gift shares to family members or key employees.
  • Do you have a requirement to register for VAT or would it benefit you to voluntarily register?
  • Consider the timing of capital expenditure which can significantly reduce the taxable profits for a period so consider based upon your expected profits for the period whether it is beneficial for capital expenditure to be incurred before or after 5 April 2021

Use capital gains tax allowances and reliefs

With capital gains in the spotlight for the Chancellor it is worth taking steps to use all of the reliefs and exemptions possible. Selling and repurchasing shares in the correct manner including “bed and spouse” can use the annual exempt amount and increase the cost of shares for future disposals.

Use Tax savings to improve investment returns

If an investment has a yield of 4% but is held by a higher rate taxpayer the net yield reduces to 2.4%. So you could improve returns by finding a tax-free investment, or even find an investment which the government will add monies to like a pension or a Lifetime ISA which will increase the returns further.

The most available tax-free environment for investments are ISA’s. The annual maximum investment is currently £20,000 and if you had invested the maximum over the last decade you would have a fund with £169,160 invested in plus any income or capital appreciation. Using the 4% yield example the £169,160 fund would have an annual income of £6,766 compared to just £4,059 if held outside an ISA.

Investments - SEIS/EIS/VCTS

These are tax incentivised investments used by sophisticated investors- for example with an SEIS investment of £1,000 HMRC will reduce the tax you pay by £500.

As long as you hold the shares for three years, you can keep the tax relief - if it doesn’t lose value you will have the £1,000 value returned to you with the tax relief providing a substantial investment return.

SEIS and EIS investments are also very useful in reducing your capital gains tax liabilities with SEISS/EIS investments by rolling the capital gains from a previous or future disposal into the value of the SEIS/EIS investment

If you would like a review of your tax position and how you might improve your financial position please email or call 01473659777