The big freeze
Jeremy Hunt’s Autumn Statement saw a number of measures which will tighten the belts of taxpayers already facing rising inflation. These measures include:
- Dividend allowance reduced from £2,000 to £1,000 from 6 April 2023, and £500 the year after, costing up to almost £600 per year for each taxpayer;
- 45% additional rate of tax threshold reduced costing up to £1,243 per year for taxpayers;
- Capital gains tax (CGT) annual exemption reduced from £12,300 to £6,000 from 6 April 2023 and to £3,000 the year after, costing up to £2,604 per year for taxpayers; and
- All other headline personal tax thresholds for income tax, NIC and inheritance tax (IHT) are frozen until 2028.
These changes are set to have a notable financial impact on taxpayers, but there are some clever steps and measures you can take to reduce this impact. Here are a few ideas to help you. Remember, if you do not use your annual allowances, these cannot be carried forward – you must use them or lose them!
Make sure you use your tax-free dividend allowance in full prior to 5 April 2023. You can be paid up to £2,000 in dividends without paying any tax. If you have a spouse and/or children, do they use their tax-free allowance? If not, let us explore whether your affairs can be arranged so that they can use their allowance.
With the announced reduction in the allowance, you should act now to benefit from the higher allowance.
Saving the day
As well as the dividend allowance, most individuals can benefit from the savings allowance, and some can also utilise the starting rate for savings. Between these reliefs, a taxpayer could receive up to £6,000 of savings income completely tax-free. Even a higher-rate taxpayer can receive £500 without paying tax. If you are married , then equalising incomes could help you and your spouse to make the most of these tax breaks.
Sharing is caring
Review your income sources: are you and your spouse both using your tax-free personal allowances and basic rate bands in full? Perhaps you have a source of income (such as shares in your company or a buy-to-let property) that could be gifted to your spouse to make sure you use both to maximum advantage? Advice should be taken to make sure that HMRC can’t challenge the steps you take.
Allocation of income sources will be especially important if either partner suffers clawback from child benefit for an income over £50,000. Equalising income between a couple can help to prevent the child benefit clawback, or at least reduce it.
If you or your spouse are not using your income tax personal allowance and you are not able to equalise income, some of the unused personal allowance may be transferred to the other partner, so long as neither of you is a higher or additional rate taxpayer.
Keeping it in the family
Could a family member help you in your business? Different classes of shares can allow dividends to be paid to family members to utilize their personal allowances and dividend allowance. This can be particularly helpful for supporting adult children at university.
Instead of gifting shares in your company or bringing a family member into your business as a partner, you could employ a spouse or an adult child.
Of course, this comes with administrative burdens, but it could help equalise income and utilise their personal allowances and basic rate income tax band, while also adding to their qualifying years for National Insurance Contributions.
Before taking this route, make sure that any employment is genuine and that the salary is fair. Don’t forget the national minimum wage!
This is a complex area with potential complications for both your business and your family, but can have benefits for both: seek professional advice before adopting it.
Charity begins at home
Making gifts to charity will feel more important than ever during the cost-of-living crisis, but don’t forget that charitable giving can help your tax position as well.
A Gift Aid contribution could pull you out of the higher rate or additional rate tax bands.
Looking after number one
Putting money away in a registered pension scheme can also serve to pull you out of the higher rate or additional rate for income tax. Basic rate tax relief is given at source on contributions to most schemes. Additional relief for higher or additional rate taxpayers is claimed via your tax return.
Commentary on the Spring budget emphasised the increases to annual and lifetime allowances. Don’t let that stop you from topping-up before the end of the year!
The rules around pension contributions are complex and it is all too easy to make a mistake. Penal tax charges can arise where you exceed your “annual allowance”. Take advice now to make sure that you optimise your income tax position without triggering unexpected tax charges.
Investments in certain tax-efficient products such as Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) or Venture Capital Trusts (VCT) can provide both income tax and CGT benefits. If you are interested in these investments, we can explain the potential tax savings for you. Independent financial advice should be taken ahead of making these investments.
Every year, you may invest up to £20,000 in ISA investments: you are able to split that allowance between a cash ISA, a stocks and shares ISA and an innovative finance ISA in any proportion.
Given the imminent reduction in the CGT annual exemption, ISA’s are a more important tool than ever, as the income and capital gains within the ISA are tax free.
Don’t forget the Lifetime ISA. HMRC will add 25% to any savings you put by (up to a maximum top-up of £1,000 pa). These ISA’s are excellent for people saving for their first home purchase. Parents can contribute to a Lifetime ISA (for example via parental gifts or dividend payments from a family business) to ensure funds are set aside for a child with the benefit of the government top-up.
The Lifetime ISA can also supplement pension provisions, especially if you’ve maxed out your lifetime pension contributions. A lifetime ISA account must be opened before you turn 40.
Junior ISA’s are available for your children with up to £9,000 invested in their ISA each year. Was your child born before 3rd January 2011? You may have forgotten the old ‘Child Trust Fund’ (CTF) they received from the government. You can still make annual contributions to CTF’s; up to £9,000 per year.
ISA allowances have to be used annually or they are lost.
Get rid of it while it’s hot
If you are considering selling a property, shares or other assets where CGT applies, think about selling sooner rather than later.
This year, up to £12,300 of profit on the sale of these assets is tax free. From April 2023, the allowance reduces to £6,000 and the year after, to a mere £3,000.
If you are married or in a civil partnership, you both have the same exempt amount. If the asset belongs outright to one of you, it is worth getting some advice to see if you can double your effective tax-free profit. Of course, this adds to the urgency: double the allowance means double the lost allowance if you delay!
Buy it later when it’s cold
Next year, the higher rate tax limit will fall from £150,000 to £125,140, pulling anyone in that income bracket into the additional rate tax band where tax is paid at 45% (39.35% on dividends).
If your income comes from self-employment, a partnership or a property business, consider deferring any big business-related expenditure to next year to reduce the impact of this change by effectively reducing your income next year. Deferred payments could include pension contributions or donations to charity.
In a similar way, look for opportunities to bring receipts into this tax year when the higher rate band will still be more generous.
Don’t pass on passing on
IHT nil rate bands and residential nil rate bands remain frozen until 2028, which will mean that they will not have increased for 19 years. Their tax advantage is slowly eroding.
Plan now and plan regularly. Make full use of your annual exemption of £3,000 every year to make smaller gifts to children or other beneficiaries. Consider planning for regular gifts out of your excess income – a great tax-free way to pay for school fees for grandchildren or university costs for your own children, or to generally help out other family or friends!
Finally, consider making larger gifts now. The earlier this is done, the greater the chance you will survive 7 years from the gift, meaning that these gifts will be free of IHT.
When making gifts, it is important to consider other tax charges that may arise; take advice ahead of making the gift.
Not all of Jeremy Hunt’s decisions were aimed at increasing taxes. The temporary concession widening the 0% band for Stamp Duty Land Tax (SDLT) was extended to end on 31st March 2025.
Now is the time to think about that second home or helping your children onto the property ladder.
Transfers of properties in divorce settlements can give rise to substantial capital gains tax charges. Your solicitor should seek expert input from tax advisers to ensure that there are no nasty surprises in store.
Less well-known changes improve the capital gains tax position for divorcing or separating couples. This means that the time limits for ‘no gain no loss’ treatment for transfers of property are extended if the conditions are met. In many cases, it may save a lot of tax if transfers are postponed until after 5th April 2023.
If any of the above financial solutions sound like they could work for you, then we recommend seeking professional advice on how best to implement them. Acting without taking bespoke advice could be costly, but if you do it right, you could protect money for yourself and your family. At PEM, we can offer all of the advice you need on carrying out one or more of these ideas: contact us today, and we can help you spring clean your taxes ready for 2023!