Top 21 Tax Planning Tips for 2021

As we approach the end of the 2020/21 tax year so you still have time to take advantage of any final tax planning opportunities. Here are our top 21 tax planning tips for 2021;

1. The tax free personal allowance of £12,500 can’t be carried forward, so if you are a director of a limited company ensure you have received a salary of at least above the Class 1 National Insurance lower earnings limit of £6,240. If you have no other earnings, this salary would be tax/NIC free and counts towards your state pension. It is also a tax deductible expense for the company. If your company does not have a PAYE scheme set up, please contact us for assistance.

2.  An individual can transfer up to 10% of their unused personal allowance to their spouse or civil partner provided they are a basic rate taxpayer, equivalent to £1,250 of the personal allowance for 2020-21. The claim can be made on the transferors Tax Return. An election for the Marriage Allowance can be made up to four years after the end of the relevant tax year, and thus a transfer can still be made for 2016/17 providing the claim is made by 5 April 2021.

3.  Ensure you have utilised your £2,000 tax free dividend allowance if you have shares. Consider transferring or issuing new shares to a spouse or civil partner.

4.  Have you utilised your full ISA and/or LISA allowances totalling £20,000 for the tax year? All income and gains derived from investments within such accounts are tax free. If you are aged 18-39, a LISA enables you to save up to £4,000 per tax year and receive a £1,000 government bonus towards your first house or retirement.  For children/grandchildren you can invest up to £9,000 tax free in a Junior ISA. Speak to your financial adviser.

5. Preserve entitlement to Child Benefit if your total income is between £50,099 and £60,000, or remain eligible for the tax free childcare scheme by keeping your total income below £100,000, by making personal pension contributions and charitable donations.

6.  Avoid a marginal rate of tax of 60% for total income between £100,000 and £125,000 by making personal pension contributions and donations to charity.

7.  Claim expenses paid wholly, exclusively and necessarily in relation to your employment, such as business mileage, use of home office, professional fees, and uniform expenses. You have four years from the end of the tax year to claim overpayment relief, so any relief for the tax year ended 5 April 2017 must be claimed by 5 April 2021.

8. Using rent-a-room relief, you can let a room in your home and receive rental income up to £7,500 tax free per tax year.

9.  Consider a salary sacrifice scheme and exchange a portion of your salary for a tax exempt benefit, such as employer pension contributions, the cycle to work scheme or an electric car and save income tax and national insurance at 32% for a basic rate taxpayer and 42% for a higher rate taxpayer.

10.  Utilise your annual tax free capital gains tax exemption of £12,300. ‘Use it or lose it’. It can’t be carried forward to future years.

11.  Transfer income yielding assets to your spouse/civil partner if they pay tax at a lower rate. Consider changing the income split to your actual share of ownership of an asset. Please contact us for more information.

12.  Determine your main residence and if you have more than one home, make a Principal Private Residence election. You have two years to make the election from the acquisition of the second property or a change of circumstance,. We’ve slipped this in but this is not dependent on the tax year.

13.  Buy, sell or gift UK residential property before 30 June 2021 to make use of the SDLT holiday.

14.  Check your most recent PAYE code to make sure you are on the correct tax code before the start of the new tax year.

15.  Make any SEIS, EIS or VCT investments now if you want to claim the relief sooner.

16.  You will receive tax relief on the lower of your earnings or £40,000 when you make a personal pension contribution. Any unused Annual Allowance will be carried forward for three tax years. If your ‘adjusted income’, ie  total income plus pension contributions is over £240,000 you will have a reduced annual allowance.  The minimum annual allowance for individual’s with ‘adjusted income’ in excess of £312,000 is £4,000. If you are a higher rate taxpayer you should check you have claimed all the additional tax relief.  If you have no earnings a net premium of £2,880 can be paid into a stakeholder pension and the pension scheme can reclaim basic rate tax from HMRC. Have you considered opening a SIPP for your spouse, children or grandchildren?

17.  Individuals who reach State Pension Age on or after 6 April 2016 need 35 qualifying years of National Insurance Contributions to receive the full state pension. To receive any UK state retirement pension, you need a minimum of ten complete years. You can request a state pension forecast by following this link https://www.gov.uk/check-state-pension The forecast will indicate any gaps in your NIC record which can be filled by paying voluntary Class 2 or Class 3 NIC. Payment should be made within six years of the end of the relevant tax year. You may also qualify for NI credits if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits are not always applied automatically, so it is worth checking your NIC record by following this link https://www.gov.uk/check-national-insurance-record

18.  Ensure your pension funds do not exceed the Lifetime Annual Allowance of £1,073,100. Funds in excess of this limit will suffer penalty tax charges when you take pension benefits. Consider making a pension protection application. Contact your IFA for more information.

19.  You can make gifts up to £3,000 each year exempt from inheritance tax (IHT). The allowance can be carried forward for one tax year. Consider regular gifts out of surplus income. These are IHT free and reduce the size of your estate for IHT purposes.

20.  From 6 April 2020 the residence nil rate band increased to £175,000 per person. The exemption applies to a ‘family home’ transferred by a married couple or those in a civil partnership to children or other lineal descendants. Ensure you update your Will.

21. If you have not yet paid your tax liability for the year ended 5 April 2020 you should do so before 1 April 2021 or set up a payment plan with HMRC to avoid a 5% surcharge being imposed.

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FUSE is an independent Chartered Certified firm of accountants and tax advisors based in Highgate Village, North London. We provide a dynamic range of services to clients working in property, media, entertainment and professional services. Our clients vary in size from self employed sole traders, small enterprises and medium size businesses. We believe that comprehensive financial planning and sound business financial advice are the keys to growth and profitability.