The end of the tax year is coming.. Are you making the most of it? – Updated for 2023
The end of the tax year is a crucial time for everyone in the United Kingdom. As the year comes to a close on April 5th, 2023, it’s important to be aware of the various tax allowances, deadlines, and changes that may affect you. The window of opportunity reduces if you want to make the most of valuable allowances, reliefs, and exemptions that could help reduce your tax bill and make sure your finances stay tax-efficient and you don’t lose out because some of these allowances will be lost forever if you do not use them.
Don’t leave it until the eleventh hour.
Every year there are plenty of people who leave their end-of-year tax planning until the last minute which increases their risk of not having time and space to improve their financial situation. Planning and taking action well before the tax year is highly recommended and by doing so you will maximize your opportunities and minimize your stress. To help you we have provided an overview of the four main areas of tax that are particularly relevant to the end of the tax year: income tax, pension contributions, inheritance tax, and capital gains tax allowance.
The list we have provided isn’t exhaustive, but it does highlight some of the main areas to consider if appropriate to your personal situation. If you would like to discuss in further detail your own financial position then please do contact us.
Income Tax
The primary source of revenue for the UK government is paid by individuals based on their earnings. The tax year runs from April 6th to April 5th and the deadline for submitting a self-assessment tax return is January 31st of the following year. For the 2022-2023 tax year, the standard personal allowance is £12,570, and the basic rate of income tax is 20%. Higher rate taxpayers pay 40% tax on earnings above £50,270, and additional rate taxpayers pay 45% on earnings above £150,000. By considering making use of the lower-rate tax bands ensure that you are reviewing the tax implications of transferring income-producing assets and taking note of anti-avoidance and settlements legislation. The way you receive an income and the rates and allowances that apply should be at the front of your mind. How much you pay depends on where you live in the UK with Scotland and Wales receiving devolved powers to set their own Income Tax bands on top of the personal allowance.
The annual dividend allowance remains at £2,000 for 2021-2022 after reducing from £5,000 this time two years ago. When we enter into the new tax year for 2022-2023 we will see the Reduction in the dividend allowance reducing from £2,000 to £1,000 from April 2023 and then in April 2023 it will further reduce to £500.
So what does this mean for you? Well, with the new personal allowance of £12,570 added to the frozen dividend allowance ( this will be the same for the tax year 2023/24), the maximum tax-free income you can receive through dividends is £2,000 . Some smaller amounts of income are tax-free up to annual limits.
Pension contributions
These are a great way to save for retirement and there are many tax benefits to doing so. The annual allowance for pension contributions is £40,000 or 100% of annual earnings capped at £40,000. The annual allowance is reduced if your adjusted income exceeds £240,000. For every £2 of adjusted income over £240,000, the annual allowance is reduced by £1, until it reaches a minimum of £4,000. It is also worth noting that it can go down to zero.
For the 2022-2023 tax year, contributions made to a pension scheme are tax-free up to the annual allowance, and any unused allowance from the previous three years can be carried forward. Any unused pension annual allowance can be carried forward for three years providing you were a member of a registered pension scheme during that period and it can also be added to your 2022-2023 annual allowance, giving a maximum pension contribution of £160,000, all of which will attract personal tax relief if you have the required level of relevant earnings.
You can also increase your basic State Pension by paying voluntary Class 3 National Insurance Contributions (NICs). If you were to consider contributing up to £2,880 towards a pension for your non-earning spouse or children. Tax relief is added to your contribution, so if you contribute £2,880, a total of £3,600 a year will be paid into the pension scheme, even if you earn less than this or have no income at all. You begin to lose your personal allowance once your adjusted net income exceeds £100,000, such that the allowance reduces to £0 when adjusted net income reaches £125,000.
Inheritance Tax
This is levied on an individual’s estate when they pass away. For the 2022-2023 tax year, the threshold is £325,00, and any estate worth more than this will be taxed at a rate of 40%. It is important to note that gifts made in the seven years before death are also included in the calculation of the estate.
You can act at any time to help reduce a potential Inheritance Tax bill ( IHT ) when you are no longer around with Gifts of up to £3,000 per year being made on an IHT-free basis. The limit does increase to £6,000 if the previous year’s annual exemption was not used.
A married couple can therefore make IHT-exempt gifts totaling £12,000 – if unused, the annual allowance can be carried forward to the next tax year only. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death.
You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.
Business Relief (BR) is a valuable IHT relief, with business property potentially receiving up to 100% relief if certain criteria are met. BR is an important part of succession planning, but due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.
It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardize your BR position.
Capital Gains Tax Allowances
Capital Gains Tax (CGT) is a tax on the gains and profits you make when you sell something, such as an investment portfolio or a second home. They allow individuals to make a profit from the sale of assets without having to pay taxes on them. For the 2022-2023 tax year, the capital gains tax allowance for everyone increased to £12,300. However this is being decreased to £6,000 for tax year 2023 to 2024, with a further reduction to £3,000 for tax year 2024 to 2025 and subsequent tax years. Any gains above this amount will be taxed at a rate of 20% for basic rate taxpayers, and 40% for higher taxpayers. Like the ISA allowance, it does not roll over, so if you don’t use it this is an example of where you will lose out and you potentially risk having to pay more CGT in the future.
It is also important to note that certain assets, such as your main residence, are exempt from the capital gains tax, and certain other assets, such as ISA investments. Additionally, if you’re a resident in the UK for less than 183 days, you may be exempt from capital gains tax on assets that you dispose of outside the UK.
Couples and those in a civil partnership also have a joint allowance of £24,600 which is an increase of £600 from the tax year 2019-2020. In some situations, it may be appropriate to transfer assets into your joint names so you both stay within your individual allowances. However, this is only effective if the gift is a genuine gift of beneficial ownership, and the transfer does not continue to benefit from the asset following the transfer.
Not every investment portfolio is subject to CGT. If you’re looking for a tax-efficient way to invest, a Stocks & Shares ISA could be for you. Just like any investment, it carries a risk – meaning you could lose some or all of your money – but if you do make a profit due to share price increases, you won’t be required to pay CGT on it.
A Bed & ISA will allow you to utilize the current year’s ISA allowance by moving investments from an unwrapped environment to the ISA tax-efficient wrapper. This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT, but once inside the ISA, the investments are sheltered from CGT in the future.
Ultimately, the end of the tax year is an important time for everyone in the U.K. By being aware of the various tax allowances, deadlines, and changes, you can make the most of the opportunities available to you and minimize your tax liabilities. Whether it is through pension contributions, inheritance tax planning, or making the most of capital gains tax allowance, there are many ways to make the most of the end of the tax year. With a little planning and preparation, you can ensure that your finances are in order and that you are ready for the new tax year ahead. If you would like to get bespoke advice from a regulated financial advisor who can look holistically at your personal financial situation then reach out and book a call with our team.
The value of investments and income from them can go down. You may not get back the original amount invested.