As accountants, we often find ourselves using analogies to explain or illustrate a topic. And, around about this time of year, there is one that you’ll often hear us reciting to clients – “It’s a marathon, not a sprint.”
While you should be thinking about how to make the most of your tax allowances and exemptions all year round, many clients leave it until we are on the home stretch, approaching the end of the tax year.
Maintaining a steady and even stride makes much more sense if you don’t want to feel exhausted on April 5 – and we’re here to act as your own personal pacemaker in the race for tax efficiency.
Here are our top eight training tips on tax allowances that will put you and your finances on top of the podium.
Adult ISA limits remain unchanged in the budget for the fourth year running which means you can save up to £20,000 a year tax free. If you use an ISA, so make sure your ISA is at the limit. If you are married, your household can get two ISA allowances, so that equates to £40,000 of combined tax-free savings. If your ISA is edging towards the threshold remember you can divert investment contributions to your spouse. It’s also worth looking at your personal savings allowance (PSA) – basic rate taxpayers can receive up to £1,000 in savings per year, free of income tax.
The Treasury announced that from 6 April the amount you'll be able to save tax-free in a junior ISA or Child Trust Fund will rise from £4,368 to £9,000 per tax year. Both are tax-free savings accounts for under-18s. Money saved in one is locked away until the child's 18th birthday, when it converts into a standard ISA. At that point, the child owns the money and can spend it on what they want.
If you own your own business, it might be more effective to consider taking dividend income instead of a salary as this would mean you may not be liable for National Insurance contributions. This really depends on your earnings but the most important thing to bear in mind is that the first £2,000 of dividend income is tax-free.
If you want to maximise your pension savings, then top of your list should be fully utilising your annual allowance. It’s possible to carry forward an unused allowance from the previous three tax years, so if your find that your current year allowance is utilised as 2019/20 draws to and end, it is well worth checking to see if you have any unused amounts from previous years.
Currently individuals with an adjusted net income in excess of £210,000 have their pension annual allowance tapered to £10,000. From 6 April 2020, the allowance will be tapered to £4,000 for individuals with total income above £300,000.
Also check that you are not subject to a pension tax charge.
If you plan on making a considerable pension withdrawal, think carefully as to whether you really need to take out such as large amount at one time. If it’s possible, it might make more sense to withdraw it gradually over a couple of tax years as this will ensure you minimise your liability for Income Tax.
You can give away £3,000 worth of gifts each tax year – that’s to say something of high value as opposed to a box of birthday chocolates! – without them being added to the value of your estate under your annual exemption. Make sure your inheritance tax gifting exemption is used up – and remember it’s possible to carry forward any unused amount for a period of one year.
Those working from home, who can claim £4 a week off their income tax bill, will be able to claim £6 from April.
If you or your partner – whether you are married or in a civil partnership – earn less than the personal allowance, you can transfer any unused personal allowance from the lower earner to the higher earner, so long as the latter is a 20% taxpayer.
This last point is cutting it fine, but if you run a business, would it be worth considering making contributions into a personal pension? This can help to reduce the company’s liabilities for tax, but this really needs to be done before the company’s financial year end to qualify. With many businesses using the deadline of March 31, the clock is ticking!
If there’s no way that you’re going to be able to put in a sprint towards the finish line, remember that you can start your training plan for 2020/21 tax efficiency today. With Hall Morrice as your coach, we’ll get you in tip-top condition and on track to record a personal best.