With both Christmas and 2023 fast approaching, the end of the tax year on 5 April 2023 will be upon us before we know it. There are a number of tax planning opportunities that will be less effective in future tax years as a consequence of some of the measures announced by the Chancellor in his Autumn Statement:
- Additional rate threshold for Income Tax reduces from £150,000 to £125,140 from 6 April 2023
- The annual exemption for Capital Gains Tax (CGT) will reduce from £12,300 per individual to £6,000 from 6 April 2023 and then £3,000 from 6 April 2024
- The annual dividend allowance will reduce from £2,000 to £1,000 from 6 April 2023 and then £500 from 6 April 2024
- The Nil Rate Band of £325,000 and Residence Nil Rate Band of £175,000 are to remain at current levels until April 2028; two years later than previously planned.
Given these tax changes, making the most of the planning opportunities available in the current 2022/23 tax year is, therefore, all the more important. With this in mind, this article outlines a non-exhaustive five point tax year end checklist which should help ensure you don’t miss out.
1. Have you maximised your pension contributions?
Pension contributions can help some high earners reclaim their personal allowance of £12,570 (the amount of income you do not pay tax on), which would otherwise be fully lost due to their income being greater than £125,140.
For example, for a person earning £140,000 in the current tax year, a gross pension contribution of £40,000 would reinstate their full personal allowance of £12,570. In practice, the individual would make a net contribution of £32,000 and would obtain £8,000 of basic rate tax relief added to their pension. Further tax relief of £13,028 could be claimed via a self-assessment tax return resulting in overall tax relief of £21,028; an effective tax relief rate of 52.6% on the gross contribution of £40,000. For the 2023/24 tax year onwards, the same circumstances and contribution level would result in slightly higher overall tax relief of £21,771; an effective tax relief rate of 54.4%.
If you have the ability to make pension contributions via salary sacrifice then there can also be National Insurance Contributions (NICs) savings, as well as the potential for employer contributions savings to be passed on to you. Salary sacrifice can also remove the need to claim any higher or additional rate tax relief through your self-assessment as the contributions are taken from your salary before tax is deducted.
2. Have you used your ISA allowance?
Individual Savings Accounts (ISAs) can be used to shelter both income and capital gains from tax. There can be significant advantages to using the annual ISA allowance of £20,000 per adult to build up a pot within the tax-efficient ISA environment. Depending on your circumstances, it may make sense to shelter high-yielding investments or those with the potential for significant capital growth within your ISA.
3. Have you used your annual CGT exemption?
If it is possible to time the disposal of an asset, then selling it in the current tax year, i.e. before 6 April 2023, could lead to tax savings compared with selling the asset after this date, due to the higher current CGT exemption of £12,300.
For example, if a gain of £12,300 arises in the current tax year, no CGT will be payable. However, in the 2023/24 and 2024/25 tax years a basic rate tax payer would be liable to CGT of £630 and £930 respectively on the same gain, with the liability for a higher rate tax payer being double these figures. The liabilities would be even higher if the gain resulted from the sale of property that is not a principal private residence, as there would be an 8% surcharge payable.
4. Have you used your dividend allowance?
For business owners, who can decide whether they pay themselves in the form of salary or dividends, dividends are still likely to be more tax efficient than salary, despite the reductions of the dividend allowance in both of the next two tax years.
This is because the dividend tax rates of 8.75%, 33.75% and 39.35% for the basic, higher and additional rate bands, compare favourably to the equivalent income tax rates on drawings taken as salary of 20%, 40% and 45%.
Drawing from the business in the form of dividends can also save both the business and the employee National Insurance Contributions. However, dividends do not count as relevant earnings for pension contributions and so can limit the amount that can be contributed to a pension.
This can be a complex area and advice should be sought from both an accountant and a Wealth Advisor to ensure that the chosen route is the most appropriate for your objectives and circumstances.
5. Have you used gifting allowances?
By freezing the Inheritance Tax (IHT) nil rate bands, more Estates will be brought into paying IHT, especially as property values continue to increase. Each individual can make gifts of up to £3,000 each year which will immediately leave their Estate for IHT purposes. Any unused 'annual exemption' can only be carried forward one tax year, so it is sensible to regularly use this exemption if you have a potential IHT liability. Small gifts of up to £250 per person are also allowable and there are further allowances in relation to weddings and civil partnerships.
At Womble Bond Dickinson Wealth we have a renowned team of financial advisors who are experienced in advising clients on the various and complex aspects of tax planning, including structuring investments to maximise tax efficiency. If you would like to discuss your own tax planning in more detail with one of our expert advisors, a member of our team would be pleased to hear from you.
This article is provided for general information only and reflects the law at the date of publication. It does not constitute legal, financial, or other professional advice so should not be relied on for any purposes. You should consult a suitably qualified lawyer or other relevant professional on a specific problem or matter. Please see our terms and conditions for further details.