With the clock ticking before the end of the current tax year on 5th April 2022, the countdown is on to make the best use of tax breaks and allowances available.
Here we look at 5 questions to ask and potential actions to take.
Can I make an ISA contribution?
Each adult has an annual ISA allowance of £20,000 between 6th April in one year to 5th April in the following year. All types of ISA – Cash, Stocks & Shares and Lifetime ISAs – fall within an individual’s single annual allowance. ISAs are a potentially powerful tool for building up tax-free savings, especially considering that withdrawals are free of taxable charges. Those that have available cash with room to spare within their annual ISA allowance could consider topping this up with a lump sum payment.
Do I want to make any additional pension contributions?
The tax friendly benefits of pensions are widely known and there are many benefits to maximising pension contributions in a tax year depending on your level of earnings and employment status. Individuals can save as much as 100% of earnings into their pension each tax year up to a maximum of £40,000 gross. With the cost of living rising and people tending to vastly underestimate how much they will need in retirement, making the most of the allowable pension contributions could make a significant difference to your pension pot in later life.
It’s also important to remember the carry forward rules for pension contributions, which may be available for some individuals. Once the current tax year allowance has been fully utilised, it is then possible to look back to the previous three tax years and a make a lump sum pension contribution equal to the unused allowances in the previous three years, so long as you have the earnings to support the contribution. This can be a powerful way to boost a pension pot if you have a cash lump sum available.
Is my National Insurance record complete?
You can make voluntary National Insurance contributions from 2014 – 2015 if this was an incomplete year in your record. To get the full new flat rate State Pension, you normally need 35 qualifying years of National Insurance contributions (NICs). You have the option of making voluntary class 3 contributions to help bridge this gap to enhance your guaranteed State Pension.
Usually it’s only possible to fill National Insurance gaps for the previous six tax years but men born after 5 April 1951 and women born after 5 April 1953 have until 5 April 2023 to pay voluntary contributions to make up for gaps between April 2006 and April 2016, if they’re eligible.
We would always recommend people regularly obtain their State Pension forecast and National Insurance record in order to keep tabs on whether they are on track for a full State Pension. However, it isn’t always the right thing to pay voluntary National Insurance contributions. Therefore, we recommend contacting the Future Pension Centre Helpline.
Shall I take additional dividends?
A dividend tax increase will apply from April 2022, with rates on dividend income increasing by 1.25% across all income band rates. For the 2022/23 tax year, basic, higher and additional rate taxpayers will pay 8.75%, 33.75% and 39.35% respectively on dividend income. For those with the ability, it might be worth looking at the options to maximise dividend income before 6th April 2022, when the new rates will apply. For directors, it could be worth considering bringing forward dividend payments if there are sufficient profits available within the business.
Have I utilised my Capital Gains Tax allowance?
The Capital Gains Tax (CGT) exemption is, on the whole, underutilised by most individuals. For the tax year 2021/22 individuals have a tax-free allowance on capital gains of up to £12,300.
Those with taxable investments should carefully plan the timings of when they take profits, using CGT annual allowances to fund income or cash requirements before 5th April each tax year.
Another option is to take profits within the CGT allowance and move the money into more tax efficient investment vehicles such as pensions and ISAs.
If you would like further advice in respect of any of the information discussed in this article, our financial advisers can help. Please get in touch with us.