Albert Einstein – the man who brought us the theory of relativity – once said, “The hardest thing in the world to understand is the income tax” and yet, given the complexity of the UK tax system in general, income tax is probably one of the relatively straightforward UK taxes to understand and plan for.

However, although taxes are not always at the top of our list of things to tackle, the recent headlines – including the fact that the UK tax burden is at its highest for 70 years – will only serve to reinforce the importance of the tax year end and, as such, you should ensure you have used all your available allowances and reliefs for 2021/22. To help here, we’ve summarised some of the important tax allowances, exemptions and reliefs, plus the most prevalent tax-efficient investing options, for you to consider, including any recent changes.

1. Capital Gains Tax

Although two reports were published by the Office of Tax Simplification (OTS) in 2020 and in 2021, it is the second paper that the government responded to and only moved forward with five of the 14 changes recommended.

Of these five, most are still being worked through, so just two recommendations have or will soon be implemented. These are:

  1. Extending the reporting and payment deadline for property sales from 30 to 60 days

    Relevant for sales completed on or after 27 October 2021, sellers welcomed the extension given the complexity of calculating profits with regard to property sales, and especially if it is a property that you have lived in, but is no longer your main residence. It’s important to also note that you need to submit an online return using a specific reporting service and make a payment on account before the 60 days is up.And although the government is planning to create one portal for all capital gains tax (CGT) filings, this won’t be live for some time. As such, you still need to log in to a different gateway to report and pay any tax due on non-property transactions, or submit the details via your annual self assessment tax return.
  2. Better terms for separated and divorcing couples

    Currently, although spouses can transfer assets on a ‘no gain no loss’ basis to each other while they are married, that allowance no longer applies following the end of the tax year after their decree absolute is granted (or final order when the language changes on 6 April 2022).So, the government is consulting on extending that ‘no gain no loss’ window to either the end of the tax year at least two years after separation; or within a reasonable timeframe which would be set out for a transfer of assets in a financial agreement approved by a court (or its equivalent in Scotland).

Additionally, although a further five (on top of the three being worked through) are still being considered, it’s also worth noting that the ‘thorny’ recommendations have been kicked into touch for now. These were that the annual exempt amount be reduced significantly, CGT rates be aligned to income tax rates, the capital uplift on death be removed, and business asset disposal relief, previously known as entrepreneurs’ relief, would be reformed.

It’s also worth remembering that there is still no CGT to pay on personal possessions – also known as chattels – if they are sold for less than a £6,000 profit, or if they are exempt. The list of exempt items, classed as wasting chattels as they have a predictable life of 50 years or less, remains untouched and is worth knowing about as it includes clocks, car and wine, but also most mechanical items.

2. Inheritance tax

With the government responding to the OTS 2019 report on the simplification of inheritance tax (IHT) and stating they would not be proceeding with any of the recommendations , we are unlikely to see any major changes to IHT until April 2026 at the earliest.

Among the changes suggested, but not happening, were the introduction of a gift tax, and the abolishing of the under-used, but valuable, exemption of the gifting out of regular income. Often used by our clients, you can also continue to use your annual £3,000 allowance either to gift to one person or split it between several individuals, and it can be carried forward one tax year if you have not used it. Other gifting options are also available, details of which can be found here.

One recommended change that was adopted was to the probate process, which has now been ‘tweaked’ and applies to those administering an estate of someone who died on or after 1 January 2022. Here, the value of the estate now only needs to be reported if you’re applying for probate – the legal right to deal with someone’s property, money and possessions when they die – which is not always necessary.

Beyond this, all other considerations stay the same. The nil-rate band is £325,000, meaning that no IHT will be due on the first £325,000 of any estate, which includes all property, possessions, savings, investments and any other assets, regardless of who they are left to.

And the residence nil-rate band (RNRB) of £175,000 remains available for those passing on their main residence to direct descendants, such as children, grandchildren and stepchildren, as does its £2 million threshold and the lack of attention to other exemptions and reliefs which would have otherwise kept the estate under the £2 million mark.The transferable nil-rate band also continues – including the transfer of any unused allowances to the surviving partner – but, as before, only if your spouse is UK domiciled.

3. Stamp duty land tax

Stamp duty land tax (SDLT) has been a hot topic for a couple of years now, owing to the temporary reductions put in place between July 2020 and September 2021. But ‘holidays’ aside, SDLT has remained relatively untouched in recent budgets.One change that did come into play in 2021, following its announcement in 2018, was a 2% surcharge for overseas buyers purchasing residential property in England and Northern Ireland, which would sit on top of the 3% surcharge already in place for those buying a second property anywhere in the world, and could mean that some overseas buyers might pay up to 17%. Similar surcharges exist in Scotland and Wales, although there is no additional charge specifically for overseas buyers.

And, although any other changes have yet to be announced, it’s worth noting that HM Revenue & Customs (HMRC) consultations are currently underway and changes may be announced – either later this year or early next – with regard to:

  • SDLT calculation for purchases of mixed-property, i.e. those that consist of both residential and non-residential property
  • Multiple dwellings relief which is available on purchase of two or more dwellings.

We will provide an update when these changes are announced.

4. Charitable giving

Although giving from UK taxpayers who complete a gift aid declaration allows qualifying charities to reclaim the basic rate of tax you’ve already paid on your donation (i.e. making a £1 donation worth £1.25 to the charity), it also allows higher and additional rate taxpayers to claim back the difference between the higher rate (or additional rate) and the basic rate tax on the value of your donation, e.g. a 40% rate taxpayer, could claim back another 25p for every £1 donated.To qualify, the charity must be located in an EU member state (as well as Iceland, Liechtenstein or Norway) and has to be recognised by HMRC.It’s also worth knowing that many memberships of national organisations, such as English Heritage, London Zoo, the National Trust and the Royal Horticultural Society, among others, could be tax deductible, depending on the type of membership you take out.

If you have a favourite charity, you can consider making your annual gift aid donation before 31 January. Not only does this provide an early benefit to the charity as it starts the year, it also allows you to elect the donation be treated as if it had been made in the previous tax year and accelerate tax relief. It is also worth noting that donors are also able to give assets (e.g. land, property or stocks and shares) to a charity, instead of cash, which would generate income tax relief rather than triggering a CGT bill, and your gift would not be subject to IHT. If you give regularly, you can also contact HMRC to amend your tax code.

5. ISAs, Junior ISAs and Lifetime ISAs

Finally, don’t forget that ISA (Individual Savings Account) allowances don’t roll over for UK residents (only) from one financial year to the next, meaning that if you don’t use it, you’ll lose it.

For the 2021/22 tax year, adults continue to have an individual £20,000 allowance – a limit that has remained unchanged since 2017. This can be used on either a cash or stocks and shares ISA, and any interest, dividends or capital gains resulting from the investments held in the ‘wrapper’ remain free from CGT and income tax (although not inheritance tax).

Remember too that Junior ISAs (JISA) are also available and have an annual allowance of £9,000 . JISAs can be opened on behalf of a child by anyone who is over the age of 16 and a UK resident, as well as by the child themselves if they are between 16 and 18.

And for those aged between 18 and 39, you can save up to £4,000 a year in a Lifetime ISA (LISA), which can be used towards a payment for your first home or would then be earmarked for retirement, given the state adds a cash bonus of up to £1,000/25% a year on top of any contributions you make. And although you can invest more in a LISA, we suggest that you do so in a stocks and shares ISA as this will give you more flexibility, allowing you to access your investments without incurring the penalty linked to LISAs. This 25% penalty applies if you withdraw funds before you’re 60 or if you’re not buying your first property.

6. Pensions

Given allowances have remained unchanged, you can still put up to £40,000 into your pension each year, unless you earn over £240,000, or have started to draw down your pension. Pension contributions can also be backdated up to three years, if you haven’t used those allowances to date.In addition, the lifetime allowance also remains unchanged from 2020/21 at £1,073,100 and will continue at that level until April 2026. This limit is something to be conscious of when putting more into your pension given it includes the money paid in, as well as any investment gains. Once exceeded, hefty tax charges could be applied when you withdraw the money, or celebrate your 75th birthday.Tax affairs are inherently complex, which is why it’s important to get the right help and support to ensure you’re maximising your allowances and reliefs where applicable. And although we cannot give tax advice, we can work with your tax advisers (or recommend an adviser if needed) to ensure your investments and wealth are structured as tax efficiently as possible. We can also ensure your affairs are set up to reflect your individual circumstances, as well as wealth goals and ambitions, now and into the future.

Summary of tax allowances, exemptions and reliefs in 2021/22

Basic personal allowance £12,570 Tax free income1
Capital gains tax exemption £12,300 Tax free gains2
Personal savings allowance £1,000 Tax free income3
Dividend allowance £2,000 Tax free income
Pension contributions annual allowance £40,000 20% to 60% tax relief4
ISA £20,000 Tax free growth
Junior ISA (JISA) £9,000 Tax free growth5
Lifetime ISA (LISA) £4,000 Tax free growth6
Venture capital trusts £200,000 30% tax reducer
Enterprise investment scheme £1 million 30% tax reducer7
  1. Not applicable if earnings exceed £125,000 or you claim tax on the remittance basis.
  2. Not applicable if you claim tax on the remittance basis.
  3. Basic rate taxpayers can earn £1,000/year in interest before tax, higher rate taxpayers can earn £500. It is not available to additional rate taxpayers.
  4. Restriction may apply if earnings exceed £240,000. Unused allowances may be available from the previous three tax years.
  5. JISAs are available for children under the age of 18. Those aged 16 or 17 can invest in a JISA and the (adult) cash ISA scheme. They must be 18 to invest in a stocks and shares ISA.
  6. You can invest in a LISA up to the day before your 40th birthday. Withdrawals made not related to your first property purchase or pension typically result in a
  7. The limit is £1 million, or £2 million if any amounts over £1 million are invested in ‘knowledge intensive companies’.