Tips for the end of the 2020/21 tax year

As we approach the end of the 2020/21 tax year on 5 April 2021, Samantha Skyring FCCA ACIPP MAAT of TaxAssist Accountants looks at some of the key things business owners and individuals should be aware of.

Year-end tax tips for business owners

The COVID-19 pandemic has caused significant financial disruption and many businesses will have lower profits when compared to previous years. But there are some things business owners can do before the end of the UK tax year on 5 April 2021 to help.

Claim losses early

To help businesses cope after the pandemic, the Chancellor announced special new loss carry back rules in the Budget on 3 March. Current loss rules allow company trading losses to be carried back one year. For accounting periods ending between 1 April 2020 and 31 March 2022, this will be extended to three years.

For sole traders with trade losses in tax years 2020/21 and 2021/22, the Chancellor announced additional relief by allowing losses to be carried back and set against profits of the same trade for three years before the tax year of the loss.

It should be noted that some restrictions may apply, and you should seek professional help if you would like your situation to be reviewed.

Expenses

Businesses will pay tax on taxable profits, so a vital element of tax planning is to claim all deductible expenses, many of which will be included in your accounting records. These can include items such as uniforms, travel and motoring expenses, tools and equipment or even some household expenses if you work from home.

Year-end tax tips for individuals

For the tax year ending 5 April 2021, most taxpayers benefit from a Personal Allowance of £12,500:

If your income exceeds £150,000, you will pay the additional rate of income tax, which is 45 per cent in England and Wales and 46 per cent in Scotland.
Where your income is between £100,000 and £125,000, you are subject to an effective tax rate of around 60 per cent as your personal allowance is reduced by £1 for every £2 you go over the £100,000 tax bracket.

However, there may still be an opportunity to reduce your tax exposure with a bit of simple planning. In some cases, taxable income can be effectively reduced by making private pension contributions and charitable donations. This can mean you reduce the likelihood of falling into a higher rate tax and maximise your allowances.

Private pensions

Saving into a private pension can be very efficient way make a tax saving. If you pay the basic rate of tax and save £100 into your personal pension plan, the effective cost to you is only £80. The cost for higher rate taxpayers who save £100 could be as little as £60. The cost drops to only £55 for an additional rate taxpayer.

While potentially extremely tax efficient, there are several things you should consider before doing this as the amount that may be saved into a personal pension is limited by several factors:

One of the most important things to be consider is the annual allowance limit. This is the limit on the amount that can be paid into your pension each year, while still receiving tax relief. In 2020/21 the limit has been capped at £40,000. The annual allowance applies across all your pension schemes and includes contributions made by your employer.
The annual allowance is reduced by £1 for every £2 of adjusted income that exceeds £240,000. However, the allowance cannot be reduced below £4,000. Adjusted income is net income plus occupational pension contributions plus employer pension contributions.
At present, you can carry forward unused annual allowances for up to three years. This is generally subject to you having been a member of a UK registered pension scheme in those previous tax years.
The retirement fund you grow is also subject to a lifetime allowance limit of £1,073,100 for 2020/21.

Pensions can be a complicated area and there are other factors which can limit the amount you may save for your later years. Therefore, you should always seek professional help if you are not sure about the rules.

Contributing to charities

Tax relief can be claimed for cash gifts made to registered charities in the UK and several other countries and works in a similar way to making personal pension contributions.

If a basic rate taxpayer gifts £100 to their chosen charity, the effective cost is only £80 and for a higher rate taxpayer giving the same amount, the cost could be as little as £60. The effective cost drops down even further to just £55 for an additional rate taxpayer. You must ensure you have paid enough tax for the charity to claim gift aid to avoid an unintended tax bill.

This advice is provided in respect of taxation, but some areas may require financial advice.

Marriage Allowance

Basic rate taxpayers may also be able to transfer £1,250 of their unused Personal Allowance to their spouse or civil partner. You can benefit from this Marriage Allowance if all the following apply:

you’re married or in a civil partnership
you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)
your partner pays Income Tax at the basic rate, which usually means their income is between £12,501 and £50,000 before they receive Marriage Allowance

It should be noted that you cannot claim Marriage Allowance if you’re living together but you’re not married or in a civil partnership.

About the author

Samantha Skyring FCCA ACIPP MAAT is the Group Training and Communications Manager at TaxAssist Accountants, a UK wide network of small business focused accountants supporting over 78,000 small businesses across 375 locations.

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Find out more

Extended Loss Carry Back for Businesses (GOV.UK)

Rules for business expenses (GOV.UK)

Income Tax rates and Personal Allowances (GOV.UK)

Tax on your private pension contributions (GOV.UK)

Charity donations: tax relief (GOV.UK)

Marriage Allowance (GOV.UK)

Image: Getty Images

Publication date: 12 March 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.