Tax planning for 2021

Date

Jan 13, 2021

Categories

Personal Finance Tax Tips

As we start 2021 in our third lockdown due to the coronavirus pandemic, it may seem odd to consider tax planning when so much is still up in the air.  However, taxes continue regardless of covid, and so this is still a good time to plan your tax affairs before the end of the tax year on 5th April.

An obvious tax planning point would be to maximise your ISA allowances for the 2020/21 tax year (currently £20,000 each).  You might also want to consider increasing your pension savings before 5 April 2021 as the unused annual pension allowance is lost after three years. And if you’re looking to do some inheritance tax planning, it would also be a good time to review (or make) your will.

 

Tax planning for your pension

For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on your earnings. This limit covers contributions made by both you, as an individual, and by your employer.

Note that the unused allowance for a particular tax year may be carried forward for three years and can be added to the relief for the current year, but then it lapses if it’s unused. This means that any unused pension allowance for 2017/18 will lapse on 5 April 2021.

There are rumours that pension tax relief may be restricted in the Chancellor’s next Budget, which is due to take place on 3 March 2021. Under the current rules, the net after-tax cost of saving £4,000 in a personal pension for a higher rate taxpayer is £3,000. HMRC then adds a further £1,000 to your contribution and there is a further £1,000 relief when your tax liability is calculated.  This would take the value of your pension pot to £5,000, for a net cost of £3,000. Remember that pension fund investments can go down as well as up, but a 40% fall would be unlikely.

 

 

Time to review your will – IHT relief

Top of the to-do list for many individuals is to make or update their will. Many people think this is something to leave until later in life, but it is important to get things in place once you acquire property, or certainly when children come along.

In the absence of a will there are statutory rules which dictate how your assets are distributed on death. Those statutory intestacy rules may not be tax efficient, and so it’s advisable to make specific provision in your will for your unmarried partner or for the guardianship of your children. We can work with your solicitor to make sure your will is tax efficient.

One recent change that should be taken into consideration when drafting your will is the additional Inheritance Tax (IHT) nil rate band for passing on the family home to direct descendants on death. Now that the additional relief is fully phased in, it provides an extra £175,000 on top of the normal £325,000 nil rate band.  Where the allowance is unused on the death of the first spouse, the unused allowance is available on the death of the surviving spouse, potentially allowing a married couple (or civil partners) to pass on assets of up to £1 million without paying IHT.

This relief is even available when you downsize to a smaller property. For example, if a married couple currently live In a large house worth  £500,000, and then downsize to a flat worth £300,000, they could give away some of the proceeds during their lifetime and yet still benefit from inheritance tax relief based on the higher valued property.  They could even sell up completely and move into a rental property or a care home and still get the inheritance tax relief!

This additional relief is, however, restricted if your assets exceed £2 million. The rules are fairly complicated but we can review your personal circumstances to ensure that you take advantage of all the relief that you are entitled to – please just give us a call.

 

 

Summary
Tax planning for 2021
Article Name
Tax planning for 2021
Description
It may seem odd to consider future plans when so much is up in the air, but taxes continue regardless of covid and so it is still a good time to plan your tax affairs before the end of the tax year on 5th April.
Author
Publisher Name
Paish Tooth
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