Last minute tips for tax year-end planning

The end of the tax year focuses the mind of many to ensure they are utilising their various tax allowances and reliefs. With reliefs and allowances changing from 6 April, taxpayers should plan ahead to save themselves a higher bill in the future.

Income tax allowances

Personal allowance

Most UK residents are entitled to the income tax personal allowance – £12,570 for the 2022/23 tax year.

Consideration should be given to topping up income to ensure that the personal allowance is fully utilised, for example, by paying out dividends or salary from family companies or arranging income distributions from a family trust.

The personal allowance can also be maximised between spouses and civil partners by ensuring that income producing assets such as shares, bonds and other savings products are shared between them.

For individuals with income exceeding £100,000, the personal allowance is restricted. However, the impact of this can be reduced or entirely negated by making pension contributions and/or gift aid donations before the end of the tax year.

Finally, in some circumstances an individual may be able to transfer 10% of their personal allowance to their spouse or civil partner, where the transferor has income below the level of the personal allowance and the transferee is a basic rate taxpayer.

Personal Savings allowance

The personal savings allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Most types of savings income, including interest, fall within this allowance. This allowance will become more important with rising interest rates so thought should be given to structuring savings to maximise this allowance.

Dividend allowance

The first £2,000 of dividends receiving during the 2022/23 tax year are taxed at a 0% rate.

This allowance is due to fall to £1,000 for the 2023/24 tax year so shareholders should ensure wherever possible that dividends are paid before 5 April to maximise the benefit of this allowance.

Capital gains tax

Annual Exemption

The annual exemption is similar to the personal allowance, but applicable to capital gains rather than basic income. The exemption is currently £12,300, but is due to be cut to £6,000 from 6 April 2023.

Thought and consideration should be given to whether it would be appropriate to realise uncrystallised gains up to the limit by the end of the tax year, in order to realise them tax free.

Additionally, assets may be transferred between spouses or civil partners free from tax, providing the opportunity to effectively utilise a second annual exemption or make the most of capital losses.

Other

Pensions

The pensions annual allowance restricts the amount that can be contributed to a registered pension scheme each year. This is currently capped at £40,000, but can be restricted to £4,000 for high earners and those who have previously flexibly accessed pension benefits. In addition, unused allowances from the three prior tax years can potentially increase the amount that can be contributed tax free. Note that the annual allowance is due to increase to £60,000 from 6 April 2023, with the minimum allowance also increasing to £10,000 from this date.

Tax charges presently apply to pension savings in excess of the lifetime allowance of £1,073,100. Taxpayers considering crystalising their pension pots that exceed the lifetime allowance may wish to wait until after 6 April 2023, after which the lifetime allowance charge has been removed.

Tax-efficient investments and individual savings accounts (ISA)

Many taxpayers choose to make tax-efficient investments, such as the Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Venture Capital Trusts, and benefit from associated income tax relief. Similarly, savings can grow tax-efficiently within an ISA wrapper.

There are limits placed on the amount that can be invested whilst still obtaining an income tax benefit. Those considering making further investments should ensure that current year allowances are maximised wherever possible, ensuring that allowances for 2023/24 remain intact.