Date05 Feb 2021
CategoryTax, Employer Solutions, Private Client
As the end of the tax year fast approaches, Sarah Curzon, partner at Azets, provides some top tips when considering income tax.
Beware of rising income
Wage growth hit an 11 year high in 2019, and together with other tax changes, such as the loss of loan interest relief on let residential properties, the unwary could find themselves with a considerably higher level of income than in previous years.
By way of example, from April 2020, all loan interest on residential property is disallowed in the rental income computation, with instead a 20% tax credit given against tax liabilities. What this means is that, if before the changes were introduced your income was £50,000 after allowing for £6,000 in rental costs, from 2020/21 your income will now be £56,000.
The downside to this, other than a potential higher rate tax liability, is the knock-on effect on certain benefits and allowances. The savings income allowance, for example, is £1,000 for those paying tax at basic rate, but is halved to £500 for higher rate taxpayers. As shown above, by earning the exact same amount in rental income in real terms, you could end up with a higher tax liability and lower allowances.
The one to watch out for is the high-income child benefit charge, which is clawed back at a rate of 1% of the benefit for every £100 of income earned over £50,000 per individual. Again, a slight rise in wages, or the effect on rental income as described could mean you face a larger tax bill at the year end when you are required to pay back excess child benefit received.
Think about getting a new car
If you are able to choose a new company car for the year it may be worth considering changing your car to a model with lower emissions to save tax. However, not all new cars are equal, particularly when looking at traditionally fuelled vehicles.
For the three years from 6 April 2020, unusually, the taxable benefits on your petrol/diesel company car will not increase each year.
Normally the emissions move up a benefit bracket even when the level of CO2 emissions for the vehicle have not increased. However, cars registered after 6 April 2020 are subject to a new test of C02 emissions, meaning that the same car can have considerably higher CO2 emissions than under previous testing. For a standard petrol or diesel engine car, the benefit percentages go up to 37%. If you are feeling green you could go for an electric or hybrid car, where rates are based on the electric range of the car, and where benefit charges can be as low as 0% for 2020/21.
If the car is fully zero emission, for 2021/22 the proposed benefit is 1%, rising to 2% the year after, so it might be worth considering as a tax-effective option.
Care needs to be taken that you do not get hit with extra tax charges in relation to fuel. Where you don’t pay your employer back for the fuel which has been used privately, there will be a fuel benefit in kind charge based on the car’s CO2 emissions, and in most cases, the taxable cost of the benefit outweighs the cost of actual fuel used. It may be worth considering, therefore, whether it would be better to reimburse your employer in full for any private usage. Please remember that home to work travel is classed as private mileage.
Of course, the cheapest option of all is to have an employer-provided bicycle (cycle to work scheme), because, provided these are available to all employees, this does not give rise to an employment benefit at all, saves you and your employer tax, and may greatly benefit your health and the environment!
Invest for capital growth rather than for dividends
Currently, the rates of tax on income and gains are quite different.
The maximum rate of tax on gains is 20% (28% on residential property and carried interest) compared with 38.1% on dividend income, or 45% on interest/rental income if you are at the top rate of tax (or even an effective 60% rate in the narrow band where the personal allowance is withdrawn between £100,000 and £125,000).
While it is not acceptable to pretend or artificially generate gains out of income, where you have substantial investments, it would be possible to rearrange your portfolio such that it is invested in assets producing capital gains rather than income. This way you could end up with either a tax-free, or tax reduced return as part of your overall investment strategy.
You should note that tax rates can change over time, and The Office of Tax Simplification has recommended, subject to government policy, an alignment in income and capital gains tax rates. We have a budget announcement on 3 March so we expect to no more then.
Are you aware of all of the tax reliefs and allowances that you may be entitled to?
If you are unsure, then you are probably paying more tax than necessary. As the end of the tax year approaches, now is the time to act to potentially reduce your tax liability, for example more people are working from home than ever, are you aware of what relief can be claimed for this?
In our latest guide, we summarise the different tax-saving options available, profiling different measures that you should consider, to maximise your tax efficiency which could lead to cash tax savings.