Personal allowances – use them or lose them
With the end of the 2019/20 tax year approaching, now is a good time to review your available personal allowances for 2019/20 and make sure that they are not wasted.
For 2019/20, the personal allowance is £12,500. However, where income is more than £100,000, the allowance is reduced by £1 for every £2 by which income exceeds £100,000. This means that individuals with income of £125,000 or more in 2019/20 do not have a personal allowance. If your income is between £100,000 and £125,000, you will receive a reduced personal allowance.
At the lower end of the income scale, if you are married or in a civil partnership and if you are not able to use all of your personal allowance or your partner is unable to use all of their personal allowance, you can claim the marriage allowance. This works by allowing the person who is unable to use all of their allowance to transfer 10% of their personal allowance — £1,250 for 2019/20 – to their spouse or civil partner. However, this is only allowed if the recipient is a basic rate taxpayer. The marriage allowance is worth £250 to a couple for 2019/20. It can be claimed online.
At the other end of the scale, taxpayers whose income exceeds £100,000 could consider taking steps to reduce their income to below £100,000 to preserve their full personal allowance. Options include making pension contributions or gift aid donations or delaying taking salary or dividends until after 5 April 2020.
All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance of £2,000 for 2019/20. In a family company scenario, where family members have not yet used their allowance, paying dividends by 5 April 2020 to mop up the allowances can be a tax-efficient way to extract profits. The use of an alphabet share structure will enable dividends to be tailored to the circumstances of the recipient.
Pensions annual allowance
Making contributions to a registered pension scheme can be tax efficient. You can make pension contributions to the higher of 100% of your earnings and £3,600 (gross), as long as you have sufficient annual allowance available. The annual allowance is set at £40,000 for 2019/20, but is reduced for high earners. If you have already accessed a money purchase pension, you have a reduced allowance of £4,000.
The annual allowance can be carried forwarded for up to three years. However, before using brought forward allowances (earliest year first), you must use the allowance for the current year. Any allowances unused for 2016/17 will be lost if they are not used by 5 April 2020.
Capital gains tax annual exempt amount
Capital gains tax is only payable where net gains and losses for the tax year exceed the annual exempt amount. This is set at £12,000 for 2019/20. Spouses and civil partners have their own annual exempt amount.
Where a disposal is on the cards which will give rise to a capital gain, if the annual exempt amount for 2019/20 has not been used up yet, consider making the disposal before 6 April 2020 to utilise this. Remember, where a spouse or civil partner has an unused exempt amount, assets can be transferred between them on a no gain/no loss basis, making it possible to make use of their annual exempt amount too.
Inheritance tax annual exemption
The inheritance tax annual exemption allows you to give away £3,000 each year without the gift counting as part of your estate for inheritance tax purposes. If it is not used, it can be carried forward to the next tax year, but is then lost. If you do not use your exemption for 2018/19 by 5 April 2020, you will lose it. There are also various other gifts that you can make IHT-free each tax year.
Why not speak to us to find out what action you need to take to make sure your allowances are not wasted.