Your end of tax year to-do list
Are you ready for the end of the tax year on 5th April? We’re in the midst of near record inflation, a five-year freeze on most allowances and tax bands, along with cuts to capital gains tax (CGT) and dividend allowances over the next two years. By checking your finances now, you can ensure you are minimising your tax liability and maximising your savings at a time when they may be more important than ever. We’ve updated our checklist featuring 10 tax year end planning tips to consider, along with your families.
We recommend that you should always speak to a financial adviser to ensure that any actions are appropriate for your circumstances.
1. Use your ISA allowance
Currently, the total you can pay into your Individual Savings Account (ISA) annually is £20,000. It’s a tax-efficient way to save as any income from investments or interest is tax free, as are the capital gains. Could you invest in a cash ISA or a stocks and shares ISA, or add to existing investments?
Younger people (generally speaking, those aged under 50), including those saving for their first home, could also benefit from saving into a lifetime ISA. Subject to certain criteria being met, the Government pays an additional 25% on the amount invested up to an allowance of £4,000 in this tax year (which forms part of the overall £20,000 allowance).
It’s also worth considering that many ISAs are ‘flexible’ nowadays. This means that any money you may have withdrawn in the current tax year could be replaced before 5 April, on top of the £20,000 allowance. Each ISA provider is different, however, and it is important to know their rules before making additional payments.
2. Pay into your pension
We all know the importance of saving for the future, but did you know that investing into your pension can be a tax-efficient form of saving? Not only is there the potential to receive tax relief on your contributions, up to the highest level of income tax you pay, but you can also benefit from tax-free growth on investments held within the pension itself.
What’s more, contributing into a pension could move you into a lower income tax bracket, help reinstate your personal allowance (see our tip no.8 for more information) or save you child benefit payments.
In the current tax year, up to 100% of an individual’s UK earnings can be contributed to a pension to receive tax relief, subject to the annual allowance of £40,000. Unused allowances from the preceding three tax years can potentially be ‘carried forward’ to be used in this tax year also.
If you’re a business owner, taking significant profits as pension contributions could also be a highly tax-efficient way of boosting your retirement savings whilst reducing your overall tax bill. There’s no National Insurance payable on either dividends or pension contributions.
Dividends are paid from profits after corporation tax and will also be taxable in the director’s hands, though the tax-exempt dividend allowance is reducing from £2,000 to £1,000 in 2023/24 then to £500 in 2024/25. By making an employer pension contribution instead of taking profits, both tax and NI can potentially be saved. On top of this, pension contributions from a business are usually an allowable expense for corporation tax.
However, pensions are a complicated area, with important considerations for those who have drawn income from their pension and those whose income exceeds £240,000. Those with larger pensions must also consider the lifetime allowance. It is currently £1,073,100 (and it has been frozen at this level until the 2025/26 tax year), which may present further issues for people with a protected lifetime allowance, that could be lost if certain criteria are not met.
3. Consider your capital gains annual exempt amount
CGT was probably the ‘hardest hit’ tax following the Chancellor’s Autumn Budget in November.
In 2022/23, CGT may be payable on capital gains realised above the exempt amount of £12,300. The CGT rate on investments is 10% for basic rate and 20% for higher/additional rate taxpayers. For gains made on the sale of properties other than a primary residence, the rates are higher at 18% and 28%, respectively.
The exempt amount is being cut to £6,000 for the 2023/24 tax year and then again to £3,000 for the 2024/25 tax year. This may provide an opportunity to sell investments with capital gains to maximise the higher exemption amount prior to 5 April.
Selling investments up to the exempt amount could save CGT of up to £4,920 for a couple who are both higher rate taxpayers, potentially enabling them to rearrange funds in their portfolio or to generate funds for their ISA allowances. The saving in this same scenario would fall to £2,400 if the investments were to be sold in the next tax year.
4. Think sustainably
If you’re reviewing your finances, it’s a good opportunity to consider investing sustainably. At Holden & Partners, we’re experts in advising people on sustainable investments and why they make sense, not just for the planet but for your pocket too. Our own research and independent studies reveal that over the longer term, a sustainable portfolio can outperform a more traditional set of investments. 1
We offer a variety of sustainable options for you to consider.
5. Consider gifting
If you’d like to gift money to loved ones and see them benefit from it while you are alive, it is possible to do so, and it can result in reducing future inheritance tax bills. You can gift a total of £3,000 each tax year (to one person or split between several) without affecting the value of your estate. Once the current year’s allowance has been used, any unused allowance from the previous tax year can be carried forward, potentially meaning a gift of up to £6,000 could be made without incurring inheritance tax.
Gifts out of surplus income are also exempt, provided they meet certain criteria.
For more info on the intricacies of gifting, look here.
6. Check if you qualify for marriage allowance
Though Valentine’s Day has been and gone, it turns out tax can be romantic after all! This little-known benefit enables the lower earner to transfer £1,260 of their personal allowance to their wife, husband or civil partner. This can reduce their tax by up to £252. To benefit as a couple, the lower earner must have an income below the personal allowance threshold – currently £12,570. 2
You can calculate any potential tax savings here.
7. Give to charity
The pandemic and ensuing cost of living crisis has had a profound impact on charities, increasing demand for their help whilst making it harder to fundraise. 3 If you are able, there has rarely been a better time to donate. Many people are familiar with Gift Aid though another potentially efficient way to give to charity is to gift investments.
The value of the donation is deducted from taxable income, exempt from CGT and immediately outside of an estate for inheritance tax purposes – all while enabling you to support a cause close to your heart.
8. Reclaim your income tax personal allowance
Those with income between £100,000 and £125,000 suffer an effective tax charge of 60% on this slice of income as the personal allowance for income tax is gradually removed. Making pension contributions or gifting to charity can help to reclaim the personal allowance, lowering the overall tax paid.
It is also worth noting that the additional rate tax bracket is reducing from £150,000 to £125,140 from 6 April. This could provide a higher level of tax relief for those earning in excess of £125,140 as we move into the new tax year.
9. Save for your children
Children can benefit from tax-efficient saving too. The junior ISA allowance is currently £9,000 (per child under the age of 18).4 By contributing, access to the funds is given up, but control is retained over how it is invested. Once the child reaches age 18, the account becomes an adult ISA and is the child’s property outright.
You could also consider investing for their retirement by setting up and making regular contributions into a pension.
10. Further options
Once other allowances are used, additional higher-risk investment options might be considered. These include Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS). These schemes offer tax incentives to encourage investment into smaller UK companies. On top of income relief of 30% (50% for SEIS), VCTs benefit from tax-free dividends, while EISs can be used to defer a CGT liability and may qualify as inheritance tax-exempt if held for two years.
These investments are generally only suitable for certain individuals who can afford to take a high level of risk with their capital and are seeking to invest for at least five years, but ideally longer.
We’re here to help with financial planning and sustainable investments. Why not get in touch for a chat?
Please note that any thresholds, allowances, percentage rates and tax legislation stated may change in the future. The content of this communication is for your general information and use only; it is not intended to address your particular requirements. This communication should not be deemed to be, or constitute, advice. You should not take any action without having spoken with your usual adviser.
1 For example, since its launch in 2014, Holden & Partners’ Sustainable Balanced Portfolio has consistently outperformed the industry standard Investment Association Mixed Investment benchmark. Past performance is not a guide to future returns. The value of investments can go down as well as up and you may get back less than they invest.
2 Marriage Allowance – GOV.UK (www.gov.uk)
4 Junior Individual Savings Accounts (ISA) – GOV.UK (www.gov.uk)