The 2020/21 tax year ends on 5th April 2021. With this date approaching, it may be a good time to consider whether you are operating as tax-efficiently as possible this year and consider following the recent budget whether you want to plan to make any changes for the new tax year.
Use your personal allowance
If you are taking a salary under the personal tax allowance (£12,500 for 2020/21) and have no other income, it may be wise to utilise the remainder of this by declaring dividends from the company’s available profits, as no element of an un-used personal allowance can be carried forward.
The budget confirmed that the personal allowance for 2021/22 is set to increase to £12,570, this will remain fixed until 2026.
Dividends can only be taken out of your company’s post-tax profit, with personal tax being paid by the shareholder receiving them as follows:
0% on any dividends that are covered by the personal allowance
0% on the first £2,000 of dividends declared in excess of the personal allowance (this is covered by the dividend allowance)
7.5% Dividends in the basic rate band
32.5% Dividends in the higher rate band
38.1% Dividends at the additional rate (total income in excess of £150,000)
If you have not declared any dividends this tax year it may be sensible to ensure that you utilise any remaining tax-free allowances that you may have.
If you have received less than £50,000 of income during 2020/21 you will still have some of your basic rate tax band left over. As dividends are only taxable at 7.5% in this band you may wish to declare these dividends before the end of the tax year.
We have not seen any changes for 2021/22 in the rates of tax, however, the basic rate band has increased to £37,700 meaning if you receive the standard personal allowance of £12,570 the higher rate threshold will be £50,270. or the basic rate and higher rate thresholds.
Contribute to a pension
The annual allowance for personal pension contributions is currently set at £40,000 or 100% of your earnings (excluding dividends) per year – whichever is lower. Making pension contributions personally could also mean that more of your income is taxable at a lower rate.
You can carry forward any unused allowances for the past 3 years, assuming you have had a pension in place for this period. If you haven’t done so already, you may be able to benefit from additional tax relief by making the most of these contributions.
Taper relief starts to apply to the annual pension contributions limit of £40,000 when income (inclusive of pension contributions) reaches £200,000.
Review your shareholding
In certain circumstances it can be tax efficient to gift some shares to your spouse, assuming that you are legally married and living together. If you would like to discuss this further please let your accountant know.
Please note that, should you gift shares to your spouse, they will then become their property. Any dividends declared after the transfer would then be split per the new shareholding and will need to be paid to them; tax will be calculated based on the dividends that each shareholder receives and will be payable by the shareholder.
Changes to Capital Gains Tax and Entrepreneurs' Relief
In the lead up to the budget, many commentators speculated that there would be changes to Capital Gains Tax (CGT) and potentially Entrepreneurs' Relief (ER). Contractors will be relieved to hear that this did not happen. The eligibility criteria for the reduced rate of capital gains remains unaltered and should you qualify for ER the reduced rate of CGT remains fixed at 10% up to a lifetime limit of £1 million.
What else should you be aware of?
Payments on account
If your tax liability is greater than £1,000 for the 2020/21 year, HMRC will require you to make further payments on account (in advance) towards the 2021/22 liability by 31st January 2022 and 31st July 2022 (these are each usually 50% of the tax liability for the prior year).
Remember, if you have a student loan, dividends count towards your income, and hence if you have breached the repayment threshold (£19,895 for Plan 1 or £27,295 for Plan 2) there will be a student loan repayment required at 9% of any income received in excess of the threshold.
Residential property disposals
From 6th April 2020 any disposal of residential property which generates a taxable gain must be reported to HMRC within 30 days. A sale of your main residence will not generate a taxable gain, however, if you sell a second home or investment property let you will need to inform HMRC.