A contractor’s guide to tax planning for the end of the 2020/21 tax year

With the end of the tax year just around the corner, it’s time to start thinking about arranging your tax affairs as efficiently as possible before the new tax year commences on 6^th April 2021. Please continue reading for detailed summaries of tax reliefs, allowances and rates that apply to businesses and individuals, and how to maximise them for the remainder of 2020/21.

Personal allowances and reliefs

The personal tax-free allowance is £12,500, any income earned above this threshold will be taxed at 20%, 40% or 45%. Your personal allowance reduces by £1 for every £2 earned over the £100,000 threshold. This means that your allowance is zero if your income is £125,000 or above.

If you or your spouse or civil partner are not using all of your personal allowances, you could take advantage of the Marriage Allowance. The Marriage Allowance lets you transfer £1,250 of your personal allowance to your husband, wife or civil partner to reduce their tax by up to £250 in the next tax year (6^th April – 5^th April). You can benefit from the Marriage Allowance if you do not pay Income Tax or your income is below the personal allowance threshold, and your spouse or civil partner pays Income Tax at the basic rate before they receive the Marriage Allowance.

Since April 2016, individuals have grown their money tax-free, thanks to the Personal Savings Allowance. The Personal Savings Allowance allows you to receive up to £1,000 of savings tax-free if you’re a basic-rate taxpayer or up to £500 if you’re a higher-rate taxpayer. There is no relief for additional rate taxpayers. Savings in Individual Savings Accounts (ISAs) and some National Savings and Investments Accounts do not count towards your allowance. If you’re saving into stocks and shares, there’s also the Dividend Allowance, which means you can receive up to £2,000 each year in dividend income-tax.

Working from home Tax Relief

As a result of the coronavirus pandemic, millions of us have swapped our office desk for our kitchen table, which has caused an increase in our household bills. As such, it’s possible to claim tax relief of £6 a week from HMRC. Applying for this tax relief will take roughly 10 minutes, and if your application is successful, you’ll be given a new tax code.

ISAs

Cash ISAs are essentially savings accounts where the income, growth and withdrawals are not liable for Capital Gains Tax or Income Tax. Any interest you earn doesn’t count towards your personal savings allowance, so if you’re likely to make a lot of interest, you can protect more of it in an ISA. You cannot roll the £20,000 ISA allowance from one tax year to the next, so if you plan on using this years’ allowance, you must do so before 5^th April 2021.

Pension Contributions

Contractors working through a limited company are responsible for setting up their own pension scheme and can benefit from maximising the annual pension allowance. The annual allowance is £40,000 for those with adjusted yearly income from all sources, including pension contributions under £340,000 or threshold income of £200,000 or less. Personal tax relief applies on pension contributions. However, this may be restricted by the annual allowance or net relevant earnings. It is possible to carry forward any unused allowance provided you had a pension fund in place the previous year.

Stamp Duty Land Tax

If you are a first-time buyer or are considering moving house within the UK before the 31^st March 2021, you could benefit from the temporary property tax holiday. Buyers before the 31^st March 2021 will not be liable to pay Stamp Duty Land Tax on a residential property up to £500,000, which could result in tax savings of up to £15,000 for some people. Purchases above £500,000 up to £925,000 will have a 5% tax rate applied, while the higher Stamp Duty Land Tax rates and thresholds remain unchanged.

Capital Gains Tax

The Capital Gains Tax annual exemption for the 2020/21 tax year is £12,300 for individuals and £6,150 for trusts. Gains and losses held within an ISA are exempt from Capital Gains Tax, so it makes sense, particularly for higher rate taxpayers, to utilise the ISA allowance.

Transfers between husband and wife or civil partners are currently exempt from Capital Gains Tax – as long as the transfer is a genuine gift. This means partners can transfer the assets between them, and both Capital Gains allowances can be used.

You can also consider selling some of your assets at a loss if the tax year’s overall gain exceeds the annual allowance. As long as they are established in the same year, gains and losses can be offset against each other, reducing the overall gain subject to tax.

Business asset disposal relief

Previously known as Entrepreneurs’ Relief, Business Asset Disposal Relief can reduce Capital Gains Tax rates due on part or all of your business from 20% to 10%. To qualify for this relief, you must have owned the company for the last two years – either as a sole trader or in a business partnership. You can claim up to £1 million of Business Asset Disposal Relief in your lifetime, and you can do it in one go or over several claims. Please be aware only the first £1 million will qualify for the relief, anything above the threshold will be taxed at 20% (2020/21 tax year).

Corporation Tax

Companies in the UK pay Corporation Tax at 19% on profits for the 2020/21 tax year. When you are preparing your company tax return and working out your business’ taxable profit, make sure you deduct any expenses incurred wholly and exclusively for business. This could include costs for training, travel or your business premises. Removing these costs will reduce the amount of Capital Gains tax due.

VAT

The government announced a range of support measures to help businesses affected by coronavirus, one of which was an automatic interest-free deferral of any VAT due for the period between 20^th March and 30^th June 2020. The deferred payment is due in full on or before the 31^st March 2021. If you are worried about making the upcoming payment, the government has recently launched a new VAT deferral payment scheme. Instead of paying the full amount by the end of March 2021, you can make up to 11 smaller monthly instalments, interest-free by the end of March 2022.

Churchill Knight offers tailored tax planning and advice

Churchill Knight & Associates Ltd has a range of contractor accountancy services, including business tax planning and advice tailored to your circumstances and goals. If you would like more information about our limited company packages, please speak to one of our expert consultants on 01707 871622.

Please note – This blog is solely for information purposes and while considerable care has been taken to ensure the information is accurate and up-to-date at the time of publishing, some of the dates, tax rates and reliefs may be subject to future change.