Tax year end planning: Things to consider

Maximising the tax bands

If your taxable income exceeds £100,000 this tax year, HMRC remove £1 of your £12,570 tax free allowance for every £2 that you earn above £100k.

The impact of this is that income between £100,000 and £125,140 could be taxed at between 50% and 60% depending on whether the top slice of your income is taxed as dividends or other earnings.  It’s therefore advisable to keep income below £100,000 if possible, or well above this threshold.

From 6^th April 2023 there were a number of tax increases, which apply for the current tax year:

• The Additional Rate 45% tax charge is applied to income above £125,140
• All other tax bands remain frozen until at least 2028 (of course, subject to change if announcements are made in the Budget on 6^th March 2024)
• The Tax Free “Dividend Allowance” reduced from £2,000 to £1,000
• The Capital Gains Tax (CGT) Annual Exemption reduced from £12,300 to £6,000. From 6^th April 2024, this will again be reduced to £3,000
• Corporation Tax rates increased up to 25%

Given the complexity of the current tax system, it’s more important than ever to forecast personal tax liabilities.

Increasing your tax bands via gifts to charity or pension contributions

If you regularly give to charity and are a taxpayer, remember to make a gift aid declaration on your donation.

While this declaration doesn’t increase your donation amount, it significantly benefits the charity, allowing them to claim additional tax relief on the gift. Moreover, if you are a higher rate taxpayer, including these donations on your personal tax return can offer personal benefits. It expands the amount of income you can tax at the basic rate, providing additional relief against your income. Additionally, for every £2 of gross Gift Aid donations, you can restore £1 of your tax-free allowance.

Similarly, making personal contributions to a pension can also extend your basic rate tax band.

Make use of your business Capital Allowances

For businesses with March year ends, if you are thinking of buying some new equipment, furniture or similar then bringing forward this spending into the period before 31 March will mean that you can access the tax savings on the value spent now.

For example, buying a van on the 31 March 2024 for £45,000 could reduce your 1 January 2025 Corporation Tax bill by £11,250.  Wait one day and buy it on the 1 April 2024 and you have to wait until 1 January 2026 to realise the tax benefit.

For businesses that are unincorporated (not a limited company) or LLPs, even if your year-end isn’t normally 31st March, this year HMRC are changing the rules on how your business is assessed for tax.  We will be releasing a separate article shortly about this, but in short there could be a significant advantage to bringing forward expenditure and asset purchases to before 31 March 2024.

One thing to bear in mind is that, although some special rules do exist for fully electric vehicles, for most businesses cars are not given significant capital allowances, the exception being businesses that are involved in car rental, taxis etc.

Make use of your pension allowance

The 2023-24 tax year sees a return to a higher annual pension allowance, with taxpayers able to pay up to £60,000 into their pension each year. You can also utilise any annual amounts you didn’t use up from the previous three years, which would have been up to £40,000 per year for those years.

In general if you have a limited company we recommend that pension contributions are paid via the company, technically as an employer contribution.  While this means HMRC doesn’t top your pension up with an additional 20% tax credit, it does potentially save up to 26.5% for your business!

If your income plus pension contributions exceeds £260,000, or if you are already drawing down on a pension, then your annual contribution levels may be restricted and we would recommend you take specific advice from us or your IFA before making payments.

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.

(For those saving for their first home) Use up your Lifetime ISA allowance

You can pay up to £4,000 every tax year 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. The funds in this type of ISA are to be used towards buying your first house or can be withdrawn upon retirement (after age 60).

Pay money in your child’s Junior ISA

For each child, you can pay up to £9,000 into a Junior ISA for 2023/24 tax year. 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 2023/24 tax year is £6,000.  This is expected to reduce to £3,000 for 2024/25 and may be even lower in future.

To take advantage of the higher tax free allowance in 2024 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 tax free to your spouse before an intended future disposal, to make the most of their CGT allowance or perhaps if they pay a lower rate of tax.

Make gifts and reduce your Inheritance Tax (IHT) bill

IHT is charged at 40% on estates over £325,000, with an extra £175,000 given against the main residence if 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, potentially giving a combined tax free allowance of up to £1million.

Each tax year, there are a number of lifetime IHT allowances that can set against gifts made and are tax year sensitive. Using them can reduce any potential IHT bills payable on your death as your estate value is reduced and the gift no longer forms part of the taxable estate.  The main allowances are currently:

• Gifts of up to £3,000. If you don’t use this full ‘gift allowance’, you can carry the remaining balance forward one year
• Gifts of up to £250 per person
• Gifts of up to £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.