Tax Efficient Savings 2021 by Neil Grant in our Edinburgh Office

Tax Year End Planning

While we are in the first few weeks of the new year, and financial resolutions may be on the top of the list for many, it is worth bearing in mind there are still a few months until the end of the tax year. A lot of focus in 2020 has been on investment markets but just as important as the investment strategy is to ensure that you are invested as tax efficiently as possible. After all, a pound of tax saved is an extra pound in your pocket.

The list below highlights some of the most common tax-free allowances and exemptions currently available.

Individual Savings Accounts (ISAs)

The annual limit is £20,000 per person therefore a married couple could invest £40,000. The benefit of ISAs is that they grow tax free and are not subject to income tax. You don’t necessarily need £20,000 of cash savings available each year to invest, and if suitable to a client’s circumstances, part of a clients’ taxable portfolio may be sold and reinvested in an ISA for ongoing tax efficiency.

Junior ISAs

Junior Individual Savings Accounts, known as JISAs, can be opened by a parent for a child under 18. They are just as tax advantageous as an adult ISA and for that reason they are limited to £9,000 per child, which is up from £4,368 in 2019/20. As with ordinary ISAs, the allowance can be split between cash or stocks and shares.

Capital Gains Tax

The annual CGT exemption is £12,300 for 2020/21 tax year - it cannot be carried forward so if it can be used each year this makes sense. By selling some of your ‘taxable’ assets before the end of the tax year this can use up your annual exemption. Married couples are taxed individually on capital gains so the exemption is doubled on a joint asset allowing you to dispose of more unrealised gains. The disposal proceeds could be used to fund your ISA and/or pension allowances, thus utilising all three allowances.

Pension Annual Allowance

In the 2020/21 tax year you can contribute up to £40,000 into a pension, subject to UK relevant earnings. You may be able to contribute more if you have not fully used previous years allowances, but only for the last three tax years and again it would be subject to relevant earnings. Making pension contributions reduces your earnings for tax purposes and for that reason many clients sacrifice bonus payments to their pension. It is also very tax efficient for owners/directors of limited companies.

For those without any UK relevant earnings, you can still contribute £2880 each year and HMRC will add £720 of tax relief until the age of 75.

Inheritance Tax Exemption

Each year you can give away up to £3,000 and this will be immediately exempt from inheritance tax (IHT). This exemption can be carried forward for one tax year if unused and so it is possible for a married couple to gift away as much as £12,000 using combined annual exemptions. Therefore, if you have unused allowance in 2019/20 it must be used before 5th April 2021.

Based on current tax legislation which is subject to change.