As another tax year draws to a close, it is important to use this time to ensure that you are maximising your personal tax position ahead of the new tax year.
For many, if not all, the current inflationary pressures and general costs of living increases have put a lot of strain on their available income. This has been exacerbated by the freeze on the personal tax allowances and thresholds as the fiscal drag bites and causes some to pay a higher effective rate of tax as they are pushed into or over the static thresholds.
Whilst there is no one magic solution to solve this, especially as each individual’s situation will be very different, we outline a number of actions you may wish to consider.
Not all of these will be relevant to you but please contact us for specific and more detailed advice if any are of interest.
1) Equalising your income
Typically an individual and their spouse or civil partner will have differing levels of income. In such situations, it can lead to income being unnecessarily taxed at a higher rate. For example, if the higher earner, who is taxed at a higher rate, holds investment income rather than their spouse or civil partner.
In such a scenario, it is best if the spouse with the lower total income is receiving the investment income. This is so that it is taxed at a lower rate, thereby maximising the net income that the couple receive.
It is important therefore to review who is holding what and consider equalising assets between one another.
It should be possible to equalise income producing assets between spouses and civil partners tax efficiently, but care will be needed that this is structured properly and there are no unforeseen tax liabilities arising from this action.
2) Use your ISA allowance
The growth (both income and gains) within an ISA is tax-free. In addition, extracting funds from an ISA are also tax-free, which can make it attractive from a tax perspective (particularly as an accompaniment to pensions as part of your retirement planning).
Each adult can invest up to £20,000 each tax year into an individual savings accounts (ISA). A couple could therefore double up to put £40,000 into ISAs in each tax year, to shelter the growth in these funds from income/capital gains tax.
This is a ‘use it, or lose it’ allowance as it is not possible to carry any unused amounts to another tax year.
Types of ISAs
There are four different types of ISAs for different types of investments:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime or Help to Buy ISAs (with a 25% tax-free bonus of up to £1,000 per year)
You can apportion your £20,000 ISA allowance between these four types of accounts however you like, although you can only invest up to a maximum of £4,000 per year in a lifetime ISA. You can also make multiple subscriptions to the same type of ISA accounts.
3) ISAs for children
If you have minor children you, or a relative, could invest up to £9,000 per child per tax year into a Junior ISA. This allows the funds/investments to grow tax free which could help with their further education or house deposit, as they will have access and control of the funds when they reach 18 years old.
Adult children could use gifts you make to them to invest in a Lifetime or Help to Buy ISA and maximise the tax-free bonus available to them.
If you are not making the most of the ISA allowance then this is something that should be reviewed for you, your partner and your children.
You may wish to diversify your investment income and look to received dividend income rather than just interest income. Particularly as dividend income is taxed at a lower rate to other sources of income:
The taxation of dividends has increased over the years and it is important to review your anticipated tax exposure to understand if it is better to hold these investments within an ISA, equalise your holdings with your spouse or civil partner or an alternative investment. We can assist with your investment adviser to help you make the best decisions for the long-term.
For owners of companies, it is important to check if the strategy of low salary and high dividends is still tax efficient. This is not always the case, and it is important that this is reviewed to determine if there are better ways to extract funds from the company.
Income Tax thresholds – minimising the impact
Where your level of income will put you just above the basic or higher rate Income Tax band thresholds you may wish to minimise the impact by claiming income tax relief on Gift Aid donations, pension contributions or tax efficient investments
Income Tax relief will be even more valuable if you are within the tapering thresholds for:
- The High Income Child Benefit Charge (£50,000 – £60,000), where Child Benefit is clawed back or
- The tax free childcare threshold of £100,000 a year (where you lose the 25% Government top-up if at least one parent earns more than £100,000) or
- The Personal Allowance threshold (£100,000 – £125,140), where the Personal allowance is tapered away at £1 for every £2 over that threshold.
If you tip over into these thresholds the effective rate of tax is at 60% or more!
Below are some ways that may be able to mitigate this:
5) Make charitable donations count
Making a donation to charity under Gift Aid doesn’t just benefit the charity by giving your donation a boost. You also benefit by extending your basic rate band by the gross donation made (the net donation you made, plus the Basic Rate of tax reclaimed by the charity on your donation).
For example, if you are a higher rate taxpayer and you make an £80 donation to a charity, the gross value of the gift to the charity is £100 (it claims back the basic rate tax of £20 from HMRC). You can claim additional tax relief on the £100 gross donation; so £100 of income that would otherwise be taxed at 40% is instead taxed at 20%; saving you £20 of tax.
6) Additional personal pension contributions
Making net personal pension contributions to your pension policy also provides additional income tax relief. The income tax relief works in much the same way as for Gift Aid, except that your pension policy benefits from the gross contribution.
It is important to take care not to breach the annual allowance, as this will negate the income tax relief that you receive on the net pension contribution.
Please remember to review if you have any unused annual allowance for the 2020/21 tax year as this will be lost if not utilised by 5 April 2024 (it can only be carried forward for three tax years).
7) Salary sacrifice?
It may be possible to exchange your salary for tax-free alternatives, such as additional pension contributions or other benefits-in-kind (company car scheme, private medical insurance, etc.).
This will enable your taxable income to reduce below the thresholds mentioned above, so that overall your net tax position is improved by receiving your remuneration in a slightly different way.
8) Tax efficient investments
In his Autumn Statement, the chancellor confirmed the extension of a variety of tax efficient schemes such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCTs).
These schemes have favourable tax consequences such as upfront reductions in income tax (between 30% and 50% of your investment) and potentially reductions in or deferral of Capital Gains Tax.
If you are planning to make investments, we can help you review the tax consequences of these schemes, although independent financial advice is always recommended before making any decisions.
9) Utilise your capital gains annual exemption
The annual exempt amount for CGT (Capital Gains Tax) purposes is set to reduce from £6,000 to £3,000 from 6 April 2024, marking a steep drop since 5 April 2023 when it was £12,300.
If you are planning to sell any of your assets in the short-term, you may wish to consider bringing forward the sale before 6 April 2024. This could save up to £840 of CGT per person.
As with the ISA allowance, the annual capital gains exemption cannot be carried forward if it is unused. Therefore, make sure you are using it in each tax year. You may wish to explore if you can use it to transfer shares into your ISA portfolio without incurring a taxable capital gain or to uplift the acquisition costs on part of your shareholding.
Review the position
It will be beneficial for you to understand your current potential exposure to CGT on your assets. This will help you determine the impact of selling them or gifting them to a family member, for example if you are looking to undertake succession planning.
In addition, it is also important to review if you are meeting and/or maximising all available reliefs, such as Business Asset Disposal Relief (“BADR”, formerly Entrepreneurs’ Relief).
10) Review and claim any capital losses
Capital losses will, as a result, become more valuable to reduce the level of capital gains made in each tax year.
It is therefore important that capital losses are claimed, as otherwise no relief will be allowable and making sure that these are utilised in the most tax efficient manner.
It is worthwhile to check that all capital losses have been claimed. In particular, if an investment has become worthless it may be possible to make a claim to crystallise a capital loss even though this loss has not yet been formerly recognised.
Please note the time limit to claim capital losses is up to 4 years after the end of the tax year that you disposed of the asset.
11) Use your Inheritance Tax (IHT) allowances
In part of your review of your assets, projected income levels and needs, it is important to consider if it is appropriate to gift funds or assets to your children/grandchildren etc.
This can be for many reasons, such as helping them with their schooling, starting out on the property ladder etc. or even to help reduce your own exposure to IHT.
Currently, IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB) and the Residence Nil Rate Band (RNRB). The NRB is currently £325,000 and the RNRB is up to £175,000; they are fixed at this level until April 2028.
Whatever the motivation, it is important that you are using the allowances available to you in each year, such as the small gifts allowance of £250, or the annual IHT allowance of £3,000 (or £6,000 if the previous year’s allowance is unused, as you carry it forward for one tax year).
Gifts on consideration of marriage should also not be forgotten (£5,00 to children, £2,500 to grandchildren and £1,000 to anyone else).
Please also review your Wills to make sure they are still valid and do what you want them to do and both protect and benefit your loved ones accordingly.
12) Consider your cash-flow
Unless your tax bill is below £1,000, or 80% of your tax is deducted at source (e.g. through PAYE), you will be required to make two payments on account this year on 31 January and 31 July respectively.
The amount you will be required to pay is equivalent to half of your prior year income tax liability, and overpayments will only be refunded after you have submitted your self-assessment return for January 2025.
Making these payments can weigh significantly on your cash-flow if your income has dropped, so you may want to make an application to reduce your payments on account. The application can either be made online or through the post. If you would like to reduce your payments on account, we can help you determine whether you’re eligible for reduced payments on account and help you with the application process, as well as cash flow projections for your tax liabilities.
13) Are you self-employed or a business partner?
The basis period reform means unincorporated businesses will, from the 2023/24 tax year, be taxed on the profits they make during the tax year, rather than on the accounting year end which fell into the tax year.
This brings a change to those individuals or partners who have an accounting period not aligned with the tax year or a 31 March year-end. At the most extreme, those individuals or partners who had a 30 April year-end would have previously had a lag of around 21 months to pay their taxes due on their relevant profits. Under the basis they will have a much shorter lag of 9 months.
Claim your overlap profits.
When you first created your business, a portion of your profits may have been taxed twice as part of the opening years rules. This extra tax can later be recovered by claiming overlap relief. If you haven’t claimed these overlap profits, your 2023-24 tax return will be your last chance to do so.
Measuring and claiming these profits requires a little preparation. To help you, the government have set up an electronic form to access HMRC’s records of the overlap profits due to you.
Review your accounting period.
Businesses with a different accounting period will now have to use apportioned profits and estimates to report their taxable profits for the UK tax year.
If your businesses’ year-end does not fall between 31 March and 5 April, you may wish to adjust your year end to avoid additional complexity and accounting costs.
Consider how your transitional-year taxes will be spread
The adjustment to the basis period will mean an extra period will be taxed to align the taxation period with 6 April. To reduce the burden on companies’ cash-flow, these extra taxable profits will be spread over the next five years, though it is possible to pay this as part of the payment due in January 2025.
If your business is affected by this, now may be a good time to make income projections and plan your expenses to determine how to best address the tax due on the acceleration of profits.
If you have any questions on how to prepare for the year end, please contact us.
This article was correct at time of publication.