Tax year end planning: Things to consider

Take action ahead of tax increases from 6th April 2023

From 6 April 2023 there are a number of tax increases:

• The Additional Rate 45% tax charge will apply to income above £125,140
• All other tax bands remain frozen until at least 2028
• Tax Free “Dividend Allowance” is reducing from £2,000 to £1,000
• Capital Gains Tax (CGT) Annual Exemption is reducing from £12,300 to £6,000
• Corporation Tax rates will increase up to 25%

The combination of changes resulting in the increase in tax would mean that bringing forward drawings to the 2022-23 tax year could have an advantage, provided it doesn’t push you into a higher tax rate bracket.

If you are already a higher rate tax payer, say your taxable earnings are around £65,000 per year, and you are wondering about drawing an additional £10,000 dividend from your limited company in the next 6 months, drawing this before 5 April 2023 could save up to £125.

Make use of your pension allowance

The general advice is that a taxpayer can pay up to £40,000 into their pension each year. You can also carry forward any annual allowance you didn’t use up from any of the previous three years.

However, if you are a high earner or have flexibly accessed your pension the annual allowance available to you could be reduced as low as £4,000 due to the ‘Tapered Annual Allowance’. It may also be limited to your Net Relevant Earnings (NRE) if you are not a director receiving payments from your own Ltd company.  Careful consideration should be given to any payments made as tax relief may not be available should you exceed your available allowances or if your contributions exceed your NRE.

It’s also important you consider making these pension contributions direct from your company as this will result in further savings, helping to reduce the corporation tax on your profits and saving tax on the amounts no longer needing to be drawn.

Pay into your spouse’s or child’s pension

You can give a head start to children or a non-working spouse and set up a pension plan for them.

You can pay up to £2,880 each tax year which will receive 20% tax relief from HMRC and will top up their pots to the maximum allowed of £3,600 each year.

Make the most of your Individual Savings Account (ISA) allowance 

You can pay up to £20,000 across your ISAs (if you’re a couple, that’s £20,000 each), including cash ISAs, stock and shares ISAs and lifetime ISAs, which will then grow tax free subject to certain conditions.

These valuable tax efficient allowances are an important step to creating wealth in the future, so don’t let them go to waste.

Use up your Lifetime ISA allowance

You can pay up to £4,000 every tax into a Lifetime ISA and earn a 25% bonus from the government on it (if you save the maximum, you’ll get a bonus of £1,000 every year).

If you haven’t already opened one, you can only do so before turning 40, and continuing paying (and earning the bonus) until you turn 50. You can use this to go towards buying a house or retiring.

Keep in mind this £4,000 goes towards your annual ISA allowance, which for the 2022/23 and 2023/24 tax years is £20,000.

Pay money into your child’s junior ISA

For each child, you can pay up to £9,000 into a Junior ISA for the 2022/23 and 2023/24 tax years. Anyone can pay into it, but it must be set up by someone with parental control.

Utilise your Capital Gains Tax (CGT) allowance

CGT is charged on profits made when certain assets are sold or transferred. You pay tax on the gains made above your annual tax-free CGT allowance, which for the 2022/23 tax year is £12,300.  This is expected to reduce to £6,000 for 2023/24 and even lower the following year.

To take advantage of this you may want to consider selling or gifting some of your assets before 5th April, as unused allowances cannot be carried forward.

In some circumstances you can also gift a share in your asset to your spouse tax free before a disposal, to make the most of their CGT allowance or perhaps if they pay a lower rate of CGT.

Make gifts and reduce your Inheritance Tax bill

Inheritance Tax (IHT) is charged at 40% on estates over £325,000, with an extra £175,000 given against main residences left to direct descendants.  These allowances can be combined for a married couple if upon the first death all chargeable assets are left to the surviving spouse.

Each tax year, there are a number of lifetime IHT allowances that are tax year sensitive. Using them can reduce any potential IHT bills payable on your death as your estate value is reduced. Each tax year you can:

• Gift up to £3,000 using your ‘gift allowance’. If you don’t use your full gift allowance, you can carry the remaining forward one year
• Gift up to £250 per person
• Gift £5,000 to a child getting married, or £2,500 to a grandchild

Other gifts exceeding the above values can be given IHT free if the giver survives for at least 7 years post date of the gift, or if they meet specific criteria allowing regular amounts paid from income to be given IHT free.  Careful planning is often needed to meet the IHT free requirements.

Consider your options as a high earner

If you’re a high earner (over £50k), consider making additional pension contributions or charitable gifts, to extend your basic rate tax band. This will reduce the amount of tax due at higher rate whilst also help to prevent the child benefit being lost if one parent in the household earns over £50K.

For those with income in excess of £100K, in addition to general tax savings such contributions could also help to recover some of the tax free personal allowance which is otherwise lost when earnings exceed these levels.

Consider paying R&D costs now

From April 2023 there will be a cut in the Research and Development (R&D) tax relief rates. For small businesses this will reduce from 130% to 86%. For businesses that are loss making, the repayable tax credit will reduce from 14.5% to 10%.

This coincides with the changes to the corporation tax rates leading to higher charges for some.

This smaller R&D saving with a higher tax rate is not as harsh as it sounds on paper. This change will only have a minimal effect for you and your business, however, if you are expecting to incur some R&D costs in the near future, bringing these payments forward (to before 5^th April 2023) will of course, bring you savings.

Transfer of assets to a lower paying spouse or family member 

If you no longer require the income from an asset, you can transfer ownership to your spouse or another family owner. Depending on the type of asset owned and who the recipient is, the transfer could be Capital Gains Tax (CGT) free or at a lower rate of tax.

This could also be favourable to allow for Inheritance Tax savings.