Tax year end – making the most of your allowances

Chancellor Jeremy Hunt announced a number of tax measures in his Autumn statement, aiming to create fiscal stability, control inflation and fill a hole in the public’s finances following Kwasi Kwarteng’s emergency fiscal package back in September.

Unfortunately, these changes mean that individuals and businesses will pay more tax, so as we approach the end of another tax year (5th April), now is an ideal time to look at your finances and make the most of the allowances available – before it’s too late.

Independent Financial Adviser, Joe Carey gives you all the information you need here:

1. Pension contributions

Pensions offer a tax-efficient way to invest for the long term. With tax-relief on contributions, tax-efficient growth within the pot and when accessing the pension, 25% of the fund is completely tax-free! A pension is a long-term investment though; you cannot access this fund until age 55 (this age is due to increase to 57 in 2028).

You can receive tax-relief on contributions of up to 100% of your relevant earnings (for example your salary and bonus), but you can only receive tax-relief on earnings in the current tax year. Higher earners could even help mitigate the impact of losing their personal allowance or child benefit payments with a pension contribution. Employees may also consider taking a bonus as a pension contribution, should their employer be happy to do so, and business owners could consider taking profits as a pension contribution.

As a business owner,  you can opt to make contributions as an employer pension contribution from pre-tax company income, rather than making a personal pension contribution as an employee. This means that you’re able to pay the full £40,000 a year (subject to any potential reduction by the tapered annual allowance) into your pension and receive the available corporation tax relief.

The ability to make pension contributions in this way provides huge opportunity. If you’re a higher-rate tax payer, £1,000 of company profits taken as dividends would eventually give you a net income of £536.63. Direct that into your pension instead and the full £1,000 will be paid into the pension. That’s the equivalent of an 86% return on your money, simply by clawing back the income and corporation tax.

For those with lower (below £3,600) or no earnings this tax year, pension contributions of up to £2,880 net can still be made, meaning that a maximum of £720 would be added to your pension pot in tax-relief.

In addition to tax relief, you may need to consider the annual allowance, which limits contributions to £40,000 in the current tax year.  However, most of us can carry forward any unused annual allowance from the 3 previous tax years. This can be subject to complications including ‘tapering’ for higher earners and the money purchase annual allowance for those with flexibly accessed pensions.  This is a complicated area and again, we strongly recommending that you seek professional financial advice.

2. Income Tax

The freeze on the personal allowance, and the basic and higher-rate income tax thresholds in England and Northern Ireland will be extended to April 2028. The freeze on these taxes had been due to lift in 2025-26.

While this freeze may not look like a tax rise on the face of it, having thresholds that fail to rise in line with salaries, you will still pay more tax on your income – particularly if you end up in a higher tax band as a result.

The biggest change announced in the 2022 Autumn Statement was the reduction of the additional-rate income tax threshold, dropping from £150,000 to £125,140 from 6 April 2023. It’s estimated that around 250,000 taxpayers will be pushed into this higher tax band, paying 45% tax on any income above the new limit.

Lowering the additional-rate means someone earning £150,000 will pay an extra £1,200 income tax per year.

3. ISA allowance

ISAs are simple and putting your savings or investments in to an ISA keeps your money free from tax. This is a ‘use it or lose it’ allowance, though so make sure to act before the tax year ends.

In 2022/23 you can protect up to £20,000 using your ISA allowance. This allowance can be split between different types of ISA; stocks & shares, cash, lifetime or innovative finance ISA. However, the lifetime ISA limit is capped at £4,000, so if you do use this allowance, you can add the remaining £16,000 into any of the other ISA options.

For couples, the allowance means a max of £40,000 could be sheltered within an ISA (or ISAs) in one tax year. For children, you may also consider the junior ISA with an allowance of £9,000 this tax year.

Where you are investing in to an ISA, always consider speaking to an independent financial adviser before proceeding.

4. Capital Gains Tax

When we profit on something, we create a capital gain. Most things like our home, cars and typical household possessions are exempt from tax concerns. However, investments and shares held outside of tax wrappers (such as a pension or ISA), properties other than our home and some other items, when sold at a gain can become subject to capital gains tax (CGT).

The tax-free allowance is £12,300 for 2022-23, but from this coming April this will be dramatically cut to £6,000. From April 2024, it will be reduced again to just £3,000.

To make the most of this allowance you can switch between similar investments or make use of a spouse’s allowance by transferring assets between spouses. You can also use capital losses to offset gains, with previous losses available to carry forward indefinitely, providing you have notified HMRC of the loss within 4 years of it occurring. CGT planning can be very complex, so again please do speak to an independent financial adviser.

The CGT rates that apply after the tax-free allowance will remain the same, and depend on whether you are a basic-rate or higher-rate taxpayer:

Tax bandTax rate for property saleTax rate for other asset sale
Basic-rate18%10%
Higher-rate28%20%

5.Dividend Tax

From 6 April, the dividend allowance will also be cut from £2,000 to £1,000. From April 2024, it will be reduced to £500.

The rates of dividend tax, however, will remain the same:

Income tax bandDividend tax rate 2023-24
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%

6.Inheritance Tax

Depending upon factors such as your age and the value of your estate, you may want to reduce your potential inheritance tax (IHT) bill. There are a number of IHT allowances that are time and tax year sensitive. Using these allowances might mean you can mitigate the IHT charge of 40% on estates over £325,000, although the residence nil rate band is now helping many to remain outside of IHT issues, so please check your potential liability first.

To begin with, there is the £3,000 gift exemption; you can reduce your taxable estate here without any complications and you can also carry forward any unused gift allowance from the previous tax year.

There is also the £250 small gifts exemption. You can make as many gifts of up to £250 per person, per tax year as you wish free of IHT. This is, however, providing the recipient is not also part of your £3,000 annual exempt amount.

There is also the gifting under ‘normal expenditure’ exemption. If you start up regular gifts of any amount, this is usually exempt from any IHT concerns, providing this does not impact your own standard of living.

Keeping a record of any gifts will help make things a lot easier for the executors of your estate. IHT planning can potentially save significant amounts of tax, so it is always worth having a professional review of your own circumstances if you have any concerns.

7.Marriage and other allowances

In addition to the above areas, if you are married and your spouse is not using their full personal allowance and you’re a basic rate taxpayer, you can also claim the marriage tax allowance.

And if you are nearing state pension age, you can boost your state pension if you are not likely to receive the full entitlement or even making the most of the personal savings allowance/dividend allowance.

If you have worked from home this tax year (as so many of us have), you may also be eligible to claim tax relief, have a look here to see if you are eligible and submit your claim https://www.gov.uk/tax-relief-for-employees/working-at-home

These small allowances could help you save money this year.  However, we always advise that you speak to a professional who can help you plan for the long term and ensure your finances are up to date.

#TheClearAdvantage

The content of this blog is for information only and must not be considered as financial advice.  We always recommend that you seek independent financial advice before making any financial decisions.

Levels, bases of and reliefs from taxation may be subject to change.

The Financial Conduct Authority does not regulate taxation and trust advice.  Active Chartered Financial Planners recommends you speak to a Tax Adviser/Accountant for this; Active would be happy to introduce you to one of our close partners.

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