With valuable tax allowances you can still use, the lull between Christmas and the new year could be the perfect opportunity to review your finances before the tax year end.
So, escape the seasonal repeats, resist the temptation to sneak another chocolate and shut yourself away to get on top of your tax planning.
Here’s your essential tax year end checklist and five top tax planning tips to help you make the most of your time, and your money.
1. Maximise your ISA this tax year end
Individual Savings Accounts (ISAs) are one of the most tax-efficient ways to save. Free of both Capital Gains Tax and Income Tax, using your full ISA allowance should be a top priority every year, not just after this tax year end, as you won’t pay tax on interest, withdrawals, or profits.
The most you can pay into an ISA is £20,000 a year (2021/22). The ISA limit is due to remain the same in the 2023/24 tax year, but remember – if you don’t use it, you lose it!
Make sure your spouse or partner has also maximised their ISA allowance. Together, you can invest up to £40,000 tax-efficiently.
For those with children or grandchildren, the Junior Individual Savings Account (JISA) is worth looking at, too. Although contributions are limited to £9,000 each tax year, they carry all the same tax benefits as an adult ISA.
Another advantage of using JISAs is that by gifting money to younger family members, you’re removing money from your own estate, which could help to reduce the amount of Inheritance Tax (IHT) payable on your estate when you die.
2. Top up your pension
Because of the tax relief you get on the money you pay into your pension pot, a pension is one of the best ways of saving for retirement.
The Annual Allowance limits the amount you can tax-efficiently pay into your pension. This limit is currently set at 100% of your earnings or £40,000, whichever is lower.
Remember, anything above the basic rate of tax must be claimed through your tax return.
Read more: Don’t leave money on the table: £810 million in pension tax relief goes unclaimed
If you don’t use all your allowance in one year before the tax year end, you can carry any unused amounts forward up to three years. If you think you might qualify for carry forward and have the means to maximise your pension contribution, get in touch and we’ll help ensure that you’re maximising all the available opportunities.
Bear in mind that there is a limit on the total amount you can build up in pension benefits over your lifetime. The Lifetime Allowance has been frozen at £1,073,100 until April 2026. This includes your contributions, any employer’s contributions, tax relief, and investment returns.
If you’re concerned that you’re at risk of being caught out by the Lifetime Allowance, get in touch.
3. Make the most of your dividends
The Dividend Allowance means that the first £2,000 you receive in dividends is tax-free. After that you’ll be taxed according to your Income Tax band: 7.5% if you pay at the basic rate; 32.5% if you pay at the higher rate; and 38.1% if you pay at the additional rate.
If you have the opportunity to take dividend income, from either a business you are involved in or your investment portfolio, this modest allowance can help you create a tax-efficient income.
However, from April 2023, the tax rates are going to increase. The table below shows the current and the new rates of tax you’ll be liable for, depending on your tax band.
|Income Tax band
||Dividend Tax 2021/22
||Dividend Tax 2023/24
In further bad news, the Dividend Allowance is also due to be reduced in April 2022.
The amount you can earn from dividends before Dividend Tax is due will be reduced from £2,000 to £1,000 in April 2023, and then to £500 in April 2024.
If you’re a limited company director and take income as dividends from the business, it could make sense to take a bigger dividend before 5 April 2022, ahead of the incoming changes.
4. Use your Capital Gains Tax allowance this tax year end
Capital Gains Tax (CGT) is one of the most complex taxes to understand, making it one of the easiest tax traps to fall into each tax year end.
Simply put, you’re liable for CGT when you sell an asset at a profit. Whether you sell a second home, stocks and shares or valuable items like antiques or jewellery, you could be liable to pay CGT on the profit you earn.
There is a Capital Gains Tax allowance of £12,300 for the 2021/22 tax year. Any profit over this amount becomes due for tax. As with Dividend Tax, the rate you pay depends on the level of Income Tax you pay. Currently, basic-rate taxpayers pay 10% and higher-rate taxpayers pay 20% on profits over £12,300.
If you’re selling a property, the rates increase to 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.
In April 2023, the CGT annual exempt amount will fall from £12,300 to £6,000. Then, in April 2024, it will fall again to £3,000. So, in the 2023/24 tax year, you will only be able to make profits of £6,000 on non-ISA investments before CGT becomes due.
There are multiple ways to mitigate CGT. As well as the possibility of transferring assets between spouses or civil partners to make the most of combined allowance amounts, you may also wish to consider investing in an Enterprise Investment Scheme (EIS) or Venture Capital Trust to create a tax-efficient income free of CGT.
In relation to assets, there are also Business Property Relief (BPR) schemes which act as a valuable form of tax relief, should you qualify. This is a form of Inheritance Tax Relief (IHT) which reduces the value of a business or business assets in the calculation of your IHT liability.
5. Protect your family wealth by making gifts
IHT rules allow you to pass on an estate up to the value of £325,000 free of tax implications. However, anything above this threshold will be taxed at a rate of 40%.
If you opt to leave your home to your children (including adopted, foster, or stepchildren) or grandchildren, this can increase your threshold by using the “residence nil-rate band” to raise the tax-free limit from £325,000 to as much as £500,000 depending on the property value.
Read more: Are you and your family prepared for the “Great Wealth Transfer”?
Making gifts during your lifetime can help to reduce the value of your estate. There are a number of ways you and your family can gift wealth, including:
An annual gift of £3,000
Small gifts of £250
Regular gifts from disposable income – this can be complex to get right, so if this is something you’re interested in exploring, please get in touch.
There is also a “seven-year rule”, meaning gifts of any value are exempt from IHT if you live for at least seven years after making it.
IHT can also be managed and reduced using certain trusts and charitable donations, as well as using the benefits of Business Relief. If you’d like to discuss the options to reduce the damaging effects of IHT, please get in touch.
Get in touch
The use-by date for this year’s tax reliefs and allowances is 5 April 2023. Wherever possible, it’s wise to make use of every allowance you’re presented with while they are still available.
This article does not discuss every option available as tax-efficiency is different for everyone.
To find out more about how you can make the most of the tax situation now, and plan for the incoming tax changes on 6 April 2023, please get in touch.
Email firstname.lastname@example.org, book a video call, or phone us on 0207 467 2700.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.