The end is nigh - don’t miss out on pre-year end tax planning

The days are getting longer, temperatures are (hopefully) rising, and that means one thing – a new tax year is almost with us. Because many of the allowances and reliefs offered by the tax system are lost if not used each year, now is the time to make sure your tax affairs are up to date. Be careful though: some reliefs can create problems if not used correctly, and in some cases trying to save tax can actually cost you money.

Personal allowance 

The annual income tax personal allowance for 2023/24 is £12,570. If you have family members with less income than this, consider possible ways to utilise their allowance – family businesses can pay dividends or salaries (so long as actual work is performed) and trusts can distribute income to beneficiaries, for example.

£1 of the personal allowance is lost for each £2 of taxable income received above £100,000. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. Managing the timing of income between tax years, where possible, can also help – the tax payable on income of £100,000 one year and £150,000 the next is less than the tax on income of £125,000 a year for two years.

A similar tax trap applies for individuals subject to the high income child benefit charge (HICBC): where a household has received child benefit and adjusted income of a relevant person exceeds £50,000, it is clawed back proportionately, with the effect that, in a band of income between £50,000 and £60,000, every £1 of income is taxed at effective rates exceeding 50%.

Relief for pension contributions

In some cases, making pension contributions can reduce or eliminate the HICBC by reducing adjusted net income to below the £50,000 threshold. Pension contributions can also allow you to reduce your marginal income tax rate at other tax rate thresholds.

If your qualifying earnings are no more than £260,000 in the tax year, the maximum annual pension allowance is £60,000. For higher earners the allowance is reduced as income increases, to a minimum of £10,000. In addition, unused pension allowances from the previous three years can also be set against current year contributions.

Charitable giving

Charitable donations qualify for tax relief by extending the donor’s basic rate tax band. The mechanics can be confusing, but the net effect is that if a 40% taxpayer makes a cash donation of £100, the charity receives £125, and the individual can personally claim back tax of £25.

There are some traps to watch out for when making charitable gifts. If you make a donation under Gift Aid and have not paid sufficient tax to match it, your tax liability will actually increase - a Gift Aid payment of £100 by a non-taxpayer will make them liable to pay tax of £25. Not all donations qualify for tax relief either. For example, a gift to a US charity will not be allowable, but a gift to a UK charity created to support the US charity would be. Make sure that you check that your payment is going to the right entity or else both you and the charity will miss out on tax relief.

Inheritance tax

Taxpayers have a £3,000 annual gift exemption, which can be carried forward one year. This means that you can make gifts of up to £6,000 every other year without suffering inheritance tax if you do not survive the gift by seven years.

If your income is greater than your living expenses, you may also be able to make larger gifts that will not be taxed regardless of when you die. To qualify, these must form a regular pattern of giving and should be properly documented. You should take professional advice before proceeding with such a strategy.

EIS and SEIS allowances

Tax relief is given for qualifying investments in certain trading companies under the enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) rules, where the company has obtained approval from HMRC. Income tax relief at 30% (EIS) and 50% (SEIS) on the amount invested can be attractive, as well as exemption from capital gains tax on disposal and the possibility to roll over (EIS) or partially exempt (SEIS) capital gains on other assets reinvested into such investments. 

Watch out when making these investments though. To qualify for the capital gains tax exemption, you must have claimed income tax relief on the EIS or SEIS investment. For example, if you make an EIS investment in a year when you have no income tax liability, the gain made on disposal of that investment will be taxable. 

Capital gains tax

The 2023/24 capital gains tax (CGT) annual exemption is £6,000. Disposing of investments standing at a gain to utilise this amount may save tax of up to 20% (28% for chargeable residential property). A £1,200 tax saving is not to be sniffed at but may not be worth the economic risk if you want to hold the investment long-term. For example, if shares are sold and bought back within 30 days, you will be treated for CGT as though they were never sold, so if prices go up in the period between selling and reacquiring, you could miss out on growth in value that exceeds the tax saved.

The UK tax system actively encourages taxpayers to plan and act each year to use the available reliefs and allowances. Doing so can create substantial savings but care is required to make sure that your actions do not backfire, creating larger tax liabilities than they save.

For more information, please get in touch with Andrew Robins, or your usual RSM contact.