As the ‘final’ deadline for filing self-assessment tax returns has now passed we look to the upcoming end of the 2021/22 tax year in only a few short weeks. It is therefore worth taking a look at some important tax planning actions that can be undertaken before 5 April.
Year End Tax Planning
If you are lucky enough to be in the position where you have income in excess of the amount required to comfortably afford your lifestyle and immediate plans it is worth considering whether additional contributions can be made to your pension. In and gains arising in pensions are not taxable and contributions afford the individual tax relief by increasing their basic rate band. It is important to remember that contributions are limited to the lower of your annual relevant earnings and £40,000 (reduced in certain circumstances). Furthermore, funds held within pensions cannot be withdrawn until the individual reaches 57 years of age without suffering a punitive tax charge.
Similarly, ISAs afford their owner tax free growth and have the benefit that, subject to the specific rules of the provider, can be withdrawn immediately. The current annual ISA limit is £20,000.
Consider making tax favoured investments under Enterprise Investment Schemes, Seed Enterprise Investment Schemes, Venture Capital Trusts, or Social Investment Tax Relief. Each scheme has differing level and types of relief as well as strict conditions which must be met in respect of the investor, the investee, and the investment.
If you’re feeling particularly philanthropic you may also wish to make gift aid payments to qualifying charities. As with pension contributions these have the effect of increasing a person’s basic and higher rate bands and thus the amount of income (and gains) taxed at a lower rate. It should be noted that is the gift aid claim (i.e. the tax reclaimed by the charity) exceeds the amount of tax you have paid, HMRC will contact you to pay the difference.
Paying Income Tax
As well as ‘extending’ the filing deadline, in response to the pandemic HMRC also announced that taxpayers would not be subject to late payment penalties if they paid their tax bill or had a payment plan agreed before 1 April 2022.
It has recently been reported that approximately 100,000 taxpayers have been unable to pay their tax liability and have signed up to HMRC’s Time to Pay scheme.
Once the individual has filed their 2020-21 tax return, they can set up a Time to Pay arrangement online if the agreed payment period is 12 months or less and their total debt is £30,000 or less. If either of these conditions are not met a payment plan may still be agreed although this will have to be done by contacting HMRC directly. They may ask for proof of income/expenditure and assets/liabilities to support the affordability of any proposed plan.
Is should be noted that, whilst late payment penalties would not be charged, late payment interest will still accrue from 1 February. HMRC has recently increased the interest rate to 3% from 2.75% effective from 21 February 2022.
Last month we reported on the increase in the number of contractor engagements which are having a blanket determination issued to them by their end client. It is worth pointing out that, if the worker had been engaged prior to the determination, it is not simply a change to the tax treatment of the payments that will need to be considered. A recent case at the Court of Appeal found that a worker, Gary Smith, was entitled to claim back-payment for holiday not taken whilst he was engaged by Pimlico Plumbers.
Under tribunal rules, he should have made his claim within three months of each holiday period.
The Court of Appeal held that ‘a worker can only lose this right if the employer can specifically and transparently show that they gave the worker the opportunity to take paid annual leave, encouraged the worker to take paid annual leave and informed the worker that the right would be lost at the end of the year’.
Following the ruling of the 2018 Supreme Court case that Mr Smith was a ‘limb worker’ within the meaning under the Employment Rights Act and therefore entitled to certain rights as an employee.
HMRC has updated its guidance to include information on the treatment of decentralised finance (DeFi) lending and staking in proof-of-stake networks and whether they are capital or income, stressing that crypto investors must differentiate this when reporting to HMRC.
HMRC has pointed out that because of the complexity of DeFi systems, the correct tax treatment may not always be easy to determine but suggests that one such indicator would be whether the value of return to be received by the lender/liquidity provider was known at the time the agreement was made.
HMRC guidance states: ‘If the return to be received has been agreed, for example, 5% per annum, this would indicate a revenue receipt. If the return to be received is unknown and speculative (and could result in a loss from the activity), this would indicate a capital receipt.’