At the last spending review by Rishi Sunak in November, we expected that this upcoming budget would begin to restore public finances; but that was before the latest wave of Covid. It has been made clear that the Budget next week will focus on the next stage of the response to Covid; there is the immediate support to those still affected by lockdown to be balanced with medium-term goals of stimulating growth once lockdown ends, and the longer-term goal to restore public finances.
Given that we are not yet out of the woods and the easing of lockdown will be taken slowly and carefully over the next few months, we do not expect any major changes to be announced next week however, a budget so close to the end of the tax year prompts us to remind you of a number of allowances that can be used before 5th April 2021 and cannot be carried forward to next year.
Pension contributions continue to be particularly attractive and a tax efficient way for business owners to extract funds from their business; pension contributions should satisfy the “wholly and exclusively” test for the purposes of the business and therefore be deductible from company profits for corporation tax purposes. Contributions are also tax efficient for employees and the self-employed too.
The standard Annual Allowance this tax year is £40,000 with the opportunity to carry forward unused Annual Allowance from up to three years ago, subject to you having been a member of a pension scheme then. Any unused Annual Allowance from 2017/18 will therefore be lost if not used by 5th April 2021; any contributions paid are offset against the current year’s Annual Allowance before using carry forward Annual Allowance.
Non-earners can also make contributions of up to £3,600 gross benefiting from tax relief, even if they don’t pay tax.
The ISA allowance has been £20,000 since 2017; you can contribute to a Cash and/or Stocks & Shares ISA in a tax year up to the maximum of £20,000 across both types. If your ISA is a flexible ISA and you have withdrawn funds during the tax year, or charges have been deducted, you can also “replace” the amount withdrawn with a top-up contribution before 5th April 2021.
And for children’s tax efficient savings, there is a generous Junior ISA (JISA) allowance of £9,000 this tax year too. This could be combined with the annual capital gift exemption to create a tax efficient savings pot for the person giving and receiving.
Most people have a personal allowance, on which no income tax is paid, of £12,500; if your income exceeds this, or exceeds the basic, high or additional rate income tax bands, then there are ways to reduce your taxable income such as making a pension contribution, gift aid or charity donations.
Unused personal allowance can also be transferred between spouses, subject to the tax payer’s income falling into basic rate income tax rates.
For business owners, a dividend of at least £2,000 ought to be declared (assuming there are profits) to use the 0% dividend allowance, with dividends in excess of this taxed at a lower rate than earnings.
There is an IHT efficient gift allowance available of £3,000 each, and a small gifts allowance of £250. The £3,000 allowance can be carried forward to next year if not used this, but if you didn’t make use of your 2019/20 capital gift allowance you should make use of last and this tax year’s allowance by making gifts before 5th April 2021; so much better than a chocolate easter egg!
Whilst this time last year, we may have been struggling to use capital gains exemptions, with values of investments falling at the start of the coronavirus pandemic, there has been some significant recovery over the last six months or so. If you hold investments outside of ISAs, you might want to consider crystallising some capital gains to offset against your annual exempt amount of £12,300 this tax year.
Due to the Easter holiday period the last normal working day for contributions to be received will be Thursday 1st April this year, so don’t delay if you want to make use of pension or ISA allowances before they’re gone!