Year-end tax planning: making the most of your 2021/22 income

It’s a new calendar year, which means you have a fantastic (but time-sensitive) opportunity to make the most of your hard work with some savvy tax planning.

The end of the UK tax year may be a few months off, but the 5 April always rolls around more quickly than you think and the next three months are crucial to ensuring your financial health is in tip-top condition.

Let’s take a look at what opportunities there are to avoid paying unnecessary tax* as we close out this tax year.

Why make financial plans at the end of the tax year?

Smart tax planning is all about making savvy financial decisions to make your money go further. There are lots of resources available and actions you can take to limit the amount of tax you’ll need to pay for the current 2021/22 tax year.

First, it’s worth taking a look at your Personal Allowance and your taxable income.

In the UK, we have a Personal Allowance of £12,570. This is the amount of income you don’t have to pay tax on (however, your allowance may be larger if you claim Marriage Allowance or Blind Person’s Allowance).

However, not everyone will be able to take advantage of this tax break. If your net income is above £100,000, your Personal Allowance goes down by £1 for every £2 you receive. This means if your income is £125,140 or above, you’ll effectively no longer have a Personal Allowance.

Furthermore, it’s worth taking a tactical look at which tax band your income is landing in. If your personal income is between £12,571 and £50,270, you’ll be paying 20% tax. Income between £50,271 and £150,000, however, is taxed at 40%, while income over £150,000 is taxed at 45%.

That’s quite a leap! Whether you’re just on the cusp of a tax band or just want to reduce the income that you’re paying tax on, this is the time to do it!

Use your ISA allowance before the end of the tax year

If you have an active ISA, now is the time to tuck some of your personal, taxable income safely away.

ISAs (or Individual Savings Accounts) are a great resource for savvy tax planning, as any money you deposit into them is free of any further liability to Income Tax or Capital Gains Tax (CGT). This means that there’s no tax on your interest, withdrawals and any profits it might make.

While Lifetime ISAs are a great option for those under 40, Stocks and Shares ISAs can be perfect for investing for the long run (although like all investment options, there can be risks involved.)

So why is this something you need to think about right now? Most ISAs have a £20,000 annual allowance**, meaning you cannot deposit more than that figure into one or more of your ISAs throughout a single tax year.

We are swiftly approaching this year’s deadline (6 April 2022) and that £20,000 annual allowance does not roll over. It’s a “use it or lose it” situation, so if you have any personal income you’d like to protect from Income Tax or CGT, the time to invest it into your ISA is now!

For couples/married people, that’s £40,000 of income that could be saved away and deducted from your taxable income for the year!

Topping up your pension before tax year-end

For many, pensions are an ideal way to save for retirement or save money in order to pass it on to future generations.

As we draw near the end of the tax year, it’s also well worth reflecting on your pension contributions and considering how they could be topped up to reduce your taxable income.

Most people receive tax relief on pension contributions worth up to 100% of their earnings, capped at £40,000 each tax year. This is known as annual allowance and you can carry forward for up to three years.

The opportunity to carry forward your allowance from 2018/19 will be lost after 5 April 2022, so consider topping up your pension as much as you can before this date.

Given the nature of pension pots, this approach might not be the best for everyone. While your money will no longer be taxable, depending on your age it may not be easily accessible either. 

What else can you do during end-of-year tax planning?

The end of the tax year isn’t just about figuring out how to reduce your personal income.

There are plenty of other opportunities to shore up or boost your financial health in the next few months, depending on your priorities and what stage you’re at in life.

Make tax-efficient investments

While this approach can, again, help to reduce your tax liability, it can also be an opportunity to grow your wealth. Venture Capital Trusts, Enterprise Investment Schemes, and Seed Enterprise Investment Schemes can be effective ways of investing your income***.

Considering the potential tax relief benefits, the best time to consider these methods is before the current tax year ends. But, like any investment decision, there are risks involved and these kinds of investment products are not suitable for everyone (please read the note at the end of this post for more details).

Share income with a spouse or partner

If your spouse or partner has a lower or tax-free income, you can pass some of your income to them. This means that your personal income will be lower and you may receive subsequent tax relief, however, you will need to take action before 6 April 2022.

Defer your income to a later tax year

If you run your own business or are a partner in a business, you can choose to defer some of your income to the next tax year if (you guessed it) you take action before 6 April 2022.

Avoid or reduce Inheritance Tax (IHT)

If you’re at an age where you’re thinking about passing your wealth down to your children and grandchildren, consider taking advantage of the annual £3,000 gift allowance.

You can gift up to this amount without it being added to the value of your estate and therefore taxable under IHT****. No prizes for guessing when the annual deadline is!

While this might sound like a lot to think about in the coming months, it’s ultimately an exciting opportunity to ensure you can make the most of your hard-earned money.

Big financial decisions are rarely a walk in the park to make, and sound financial advice can go a long way to ensuring you’re making the best decisions for you and your family.

The team at HWIFM are here to support you in ensuring you’re at peak financial health, whatever that looks like for you. Get in touch to chat with one of our dedicated specialist financial advisors today.

* It’s important to be aware that taxation is based on current legislation which is subject to change, so this advice might not always be relevant. Taxation will also depend on your individual circumstances. The value of your investments can fall as well as rise and investors may not get back the full amount, they initially invested and past performance is not a guide to future performance. If you ever have any questions, feel free to get in touch with the HWIFM team and we will do our best to offer you sound, unbiased advice about your taxation and investments.

** Lifetime ISAs (open to those aged 18 to 39) have an annual allowance of £4,000 and Junior ISA (for those 17 and under) have an allowance of £9,000.

*** When considering Venture Capital Trusts, Enterprise Investment Schemes, and Seed Enterprise Investment Schemes, it’s important to understand the risks alongside the potential benefits. Any tax benefits depend on your individual circumstances and may be subject to change in future. The value of an investment and any income from it can fall as well as rise and investors may not get back the full amount they invest. Venture Capital Trusts in particular should be considered longer-term investments and may be higher risk for various reasons, including the fact that current tax rules are subject to change and that past performance is not a reliable indicator of future performance.

**** It’s worth being aware that the Financial Conduct Authority does not regulate Tax Advice or Inheritance Tax Planning.