The two Budgets of 2021 delivered a substantial amount of deferred tax increases, from higher corporation tax through to extra National Insurance contributions (NICs) and dividend tax. Fortunately, the October Budget did not add any more significant tax rises.
Tax levels are set to rise to their “highest sustained level in peacetime” according to the Institute of Fiscal Studies. That might explain why the Chancellor included in his speech the statement that “By the end of this Parliament, I want taxes to be going down not up”.
Your starting point should be to check if you have any unused pension annual allowance (£40,000 before tapering during the years considered here) from 2018/19. You have until the end of the current tax year to mop up this past allowance or lose it completely. However, it can only be used once your 2021/22 annual allowance is exhausted.
Unused relief can also be picked up from the years after 2018/19, again once the current year’s allowance is covered. The calculations involved can be complex, so please contact us as soon as possible if you want to take advantage of this carry forward option.
Capital Gains Tax
In May 2021 the Office of Tax Simplification (OTS) published the second part of a review of capital gains tax (CGT), originally requested by Mr Sunak. The OTS work produced some radical proposals which, if implemented, would have significantly increased the tax payable by many investors. No mention of the review was made in the Budget. The resultant uncertainty threatened to complicate year-end tax planning, leaving investors facing the difficult question of whether to incur tax now rather than do nothing and risk a higher liability down the line.
Fortunately, at the end of November the Treasury formally rejected any major CGT redesign while accepting a handful of the OTS’s minor technical revisions. Consequently, year-end CGT planning is no longer a case of second guessing the Chancellor. If you have capital gains in your portfolio, you should consider realising them up to your available annual exempt amount before the end of the tax year. One option if you wish to retain the investments is to reinvest the proceeds in an ISA or a pension.
Inheritance tax was subject to a separate OTS review undertaken before the CGT review. The absence of any mention of the OTS’s two IHT reports in the last three Budgets has, like the CGT review, complicated year-end planning. However, again the Treasury removed the uncertainty as an early Christmas present, confirming that it accepted only one (administrative) proposal and rejected all others.
Year-end IHT planning therefore has a familiar starting point: make sure you consider using the three main yearly IHT exemptions (£3,000 annual, £250 small gifts and ‘normal expenditure out of income’).
The value in tax-free ISAs is growing due to the frozen personal allowance and higher rate threshold, dividend tax increases and rising inflation. There is no carry forward of your ISA allowance, so make sure you review your 2021/22 ISA contributions before 6 April.
The value of tax reliefs depends on your individual circumstances. The Financial Conduct Authority does not regulate tax advice and tax laws can change. The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.