Tax return: A taxing question

Liz Booth examines what financial advisers can do to help clients legally reduce their taxable income

The UK’s first ever Tax Day saw the Treasury publish more than 30 tax publications, focused on the government’s tax administration strategy and further clampdowns on promoters of tax avoidance schemes.

Nimesh Shah, CEO at advisory firm Blick Rothenberg, says: “Included within the extensive number of documents, there is a review of business rates, aviation tax and a small policy tightening on business rates relief for part-time holiday lets. 

“Read into it what you may, but the Treasury also announced a review of the effectiveness of the Office of Tax Simplification.”

He adds: “There were some immediate improvements announced, including reducing the inheritance tax administration for the majority of estates that do not have a tax liability, but that was as far it went for now.”

So, what of the advice on how to legitimately avoid tax?

Sarah Coles, personal finance analyst at Hargreaves Lansdown, warns: “The real stealth taxes coming next year are not the ones that were announced in the Budget, they are the myriad of other thresholds and allowances that have not budged at all and in some cases haven’t moved in so many decades that they are practically fossilised. Meanwhile, everything from rising house prices to inflation is propelling us at speed over thresholds and into higher tax territory.”

She says it is worth clients taking steps to avoid paying more than they have to.

1. Income tax: The personal allowance and higher rate threshold will increase with last September’s inflation of 0.5%, meanwhile, the Office for Budget Responsibility (OBR) estimates wages will increase about 2% in 2021, meaning there is every chance wages will rise faster than the threshold and clients will pay more tax. For bigger earners, the key thresholds are already frozen. The additional rate threshold is £150,000 – as it has been for more than a decade – and the £100,000 threshold at which people start to lose their personal allowance stays the same.

2. Child Benefit tax charge: The £50,000 threshold at which parents start to lose their Child Benefit is still in place. This means some basic rate taxpayers will have to complete tax returns and repay the benefit as soon as one of the parents earns more than £50,000. Once a parent earns £60,000 they have to repay it all, so working parents can opt not to receive it.

3. Council tax: Councils will be able to raise rates by up to 5% if they have responsibility for social care – plus an extra £5 for local policing. This could mean the average house in Band D rises £106 from £1,818 to £1,924 next year, while the average house in Band H increases by £212.

4. Stamp duty: After the stamp duty holiday ends in September, fiscal drag will be in full effect. The average house price has risen to £251,500, dragging huge numbers of people into paying higher rates of tax.

5. Capital gains tax for property investors: House prices are currently up 8.5% in a year, which is going to mean higher capital gains tax bills for second-property investors who sell up.

6. Inheritance tax (IHT): The IHT nil rate band sticks at £325,000 and the residence nil rate band at £175,000. Meanwhile, the IHT annual tax gift allowance spends its fourth decade at £3,000. Given how house prices are increasing, more estates will have more IHT to pay.

Tax evasion means concealing income or information from tax authorities – and it is illegal. Tax avoidance means legally reducing your taxable income

7. Dividend tax: After falling this year, dividends are expected to bounce back in the coming year – great news for those who hold shares within an ISA or pension and take dividends as income. However, for those who have significant shareholdings outside of tax wrappers, because the dividend allowance has stuck firm at £2,000, the threat of dividend tax rears its head again.

Five ways to cut tax in 2021

1. ISAs: The government offers the chance to squirrel away £20,000 in this tax year – free of tax.  If a client is saving to buy a first property, is aged 18-39, and has at least a year before they buy, they should consider a LISA, because in addition to tax free growth, you get a 25% bonus on contributions. Clients can save or invest £4,000 this tax year. Don’t forget Junior ISAs too. In the current tax year, save or invest £9,000 in a JISA for any qualifying child and all interest, dividends or capital gains are tax free.

2. Pensions: Contributions to pensions attract tax relief at the highest marginal rate and the first 25% taken from the pension is usually tax-free. There is tax relief on pensions even for non-taxpayers – on the first £3,600 a year. It means clients can contribute tax-efficiently to a pension on behalf of a child.

3. Salary sacrifice: In some cases, the government will let you give up a portion of your salary and spend it on certain things free of tax (and in some cases national insurance), including pensions, childcare vouchers, bike-to-work schemes and technology schemes.

4. Spouse exemptions: Assets that produce an income can be shared between a couple, so that both take advantage of their allowances. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.

5. Marriage allowance: If one spouse is a non-taxpayer, and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,250 of their personal allowance to their spouse in the current tax year.

Liz Booth is contributing editor of PFP

Image credit | John-Holcroft Ikon