Saturday, August 20, 2022

Marginal gains and tax planning for the tax year ahead: By Jennie Brown, tax partner at Streets Chartered Accountants

Jennie Brown, tax partner at Streets Chartered Accountants, offers ‘marginal gains tax tips’.

I have always been fascinated with concept of marginal gains and how through constantly making small incremental improvements, high performance levels can be reached.

Reading some of the stories of how coaches have applied the strategy with athletes training for the Olympics, and achieved incredible results, is really captivating.

How might this have anything to do with tax I hear you say? Well, quite often when I am helping clients protect their wealth and ensuring they have a financial plan aligned with their goals and objectives, it is not one singular thing that is implemented to improve their tax position, but often a number of things, on repeat, over a number of years.

I am a firm believer when helping my clients, that before jumping into the more complex areas of tax planning, we take stock and look at the basics first, to have a strong foundation to move on from as appropriate.

There are a plethora of annual reliefs and exemptions that can be considered year on year, and by focusing on these first and ensuring they are not overlooked, over time, these can have a significant impact on improving your tax position; marginal gains.

So, what are these tax marginal gains? I highlight below those keys areas that I would recommend you are aware of and take stock of year on year, and of course, with everyone’s situation being different, it always makes sense to take advice.

  • Making use of your tax-free personal allowance, transferring any unused element if possible
  • Utilising the basic rate of tax and consider the equalisation of income between spouses/civil partners, to prevent one party being a higher rate tax payer and the other having unused basic rate band
  • Bear in mind the key thresholds; income over £50,000 can see a tapering of the child benefit and income over £100,000 can see a tapering of the personal allowance, giving rise to an effective rate of tax of 60%
  • If you have made a loan to your business, consider the payment of interest. Not only will this provide a corporation tax deduction for the company, but it could allow you to use the starting rate for savings and personal savings allowance
  • Pension contributions are always a favorite for the tax advisor, especially for those who have exceeded the above-mentioned thresholds. By making pension contributions these can reduce the amount of taxable income and enable investments to be managed in a tax-free wrapper, free from capital gains and inheritance tax, with more flexibility in recent years over the access on retirement
  • Charitable giving can also qualify for tax relief which can in turn increase the charities donation
  • ISA’s can be used to save cash or invest stocks; each tax payer has an annual allowance of £20,000 (for 2021/22). No income tax is due on the interest or dividends and any profit made on investments is free of capital gains tax. Family members can also put up to £9,000 in a junior ISA on behalf of a child for 2021/22. In addition, the lifetime ISA can be helpful for fire time homebuyers between the ages of 18-40, and up to £4,000 of savings can be topped up with a government bonus of up to £1,000
  • There are a number of investments which can also provide tax relief and these can provide instant tax relief against income tax for a percentage of the investment made, together with other tax advantages. Naturally, advice should always be sought with such investments
  • The capital gains annual exemption, currently £12,300 and frozen at this level until April 2026 is often overlooked. It is an exemption that you use or lose, so consideration should be given as to whether this can be used year on year. Consider the timing of disposals so they are staggered where possible to utilise the exemption. Together with the utilisation of income, the same applies to this exemption. Transfers between spouses/civil partners can be transferred free of capital gains tax, and therefore considering as a couple where relevant the combined use of allowances such as this is not to be overlooked. Naturally, there is a lot of more involved planning that can be considered with capital gains, deferment of gains and losses amongst a whole host of other rules and reliefs
  • There are a number of annual exemptions to consider for Inheritance Tax, also everyone has a £3,000 gifts exemption and if not used, this can be carried forward for one year only. There are also small gift exemptions and exemptions for gifts on marriage together with an exemption which is often overlooked known as regular gifts out of income. If you are not aware of these exemptions and want to make gifts, then it would be beneficial to take advice.

In addition, don’t forget, the tax rate applicable to dividends went up by 1.25% from 6 April 2022.

As mentioned, the above are the ‘marginal gains tax tips’ across Private Client planning and from here greater planning can be considered.


For more information on the basics and more involved planning, please get in touch with Jennie Brown

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