The personal allowance is due to increase to £12,570 for the 2021/22 tax year, and then remain fixed until 2026. If salaries increase in line with inflation, this could result in a greater proportion of tax being paid by the majority of the population. One way to avoid this: if you are married, is to use the marriage allowance. This is available if one of the couple is a basic rate taxpayer, and the other is a nil rate tax payer, with 10% of the nil rate tax payers personal allowance being able to be transferred to their spouse. This is on the basis that it will not consequently move them into the basic rate tax band themselves.
Another option is to consider making additional pension contributions, whether this be through a company pension scheme (payable via the relief at source option, which includes salary sacrifice) or as a ‘net pay’ contribution, where you make a pension contribution from your bank account/savings.
An alternative method to mitigate additional tax due, which is less common, is to reclaim any tax paid using a Venture Capital Trust (VCT), or Enterprise Investment Scheme (EIS). These investments do carry risk; however, you are able to claim 30% tax relief on the investment amount, which is capped at £200,000 for a VCT, and £2,000,000 for an EIS.
The lifetime allowance for pensions will also remain level until 2026, and those who are in a position where they could breach this, may wish to invest capital into alternative tax-efficient schemes, such as a VCT or EIS, to avoid a lifetime allowance charge in the future.
Inheritance tax planning can also be considered using an EIS, under business property relief rules. With the nil rate band also remaining at its current level of £325,000 (per individual), until 2026; this is another factor of your long-term financial planning that should be considered.
There are conditions that need to be met to ensure that the different forms of tax relief are able to be applied with a VCT or EIS investment. You should therefore contact one of our financial advisers at Lovewell Blake Financial Planning Limited, to ensure that any investment made is into a legitimate and qualifying solution.