This is Tip #3 of the blog series with the main topic of Pre-Tax-Year-End tax planning. If you missed Tip #1 and Tip #2 on Venture Capital Trusts and Enterprise Investment Schemes, check out the AWM blog.
These tips are to help make sure that you best utilise your Tax-Year-End options and this week we focus on Maximising Your Allowances*
Everyone is able to gift £3,000 to someone and it will be immediately outside of your estate for inheritance tax. You can top this up to £6,000 if you didn’t use the allowance in the previous tax year too.
Another way to reduce tax and at the same time boost your retirement pot is to make sure you use up your entire annual pension allowance, which is currently £40,000.
Questions you have about optimising your pension contributions:
Once you earn more than £150,000, your annual allowance starts to fall, known as the ‘tapered annual allowance’. The tapered allowance applies if your ‘adjusted income’ is more than £150,000. Adjusted income is your total taxable income – so salary, dividends, rental income, savings interest, plus employer contributions. If your total adjusted income is between £150,000 and £210,000, you lose £1 of annual allowance (starting at £40,000) for every £2 of adjusted income. Once your income reaches £210,000, you’ll be left with an annual allowance of £10,000.
If your total pension savings exceed the lifetime allowance of £1.055 million in 2019/20, you may be liable to tax when you draw benefits.
Everyone has a Capital Gains Tax allowance of £12,000 in this tax year. You can deliberately create a gain on an investment to use the allowance, so that when the investment is finally encashed you may not have any Capital Gains Tax to pay.
*utilising these allowances are provider timeline dependent.