When did you last review your personal and/or business financial affairs?
With the 05 April 2024 tax year end fast approaching, it is a good time to review your finances to make sure you are taking advantage of the allowances and tax reliefs. This can help you avoid common pitfalls, check for opportunities, and maximise potential savings.
Year end tax planning checklist for personal tax
1. Avoiding the 60% effective rate of income tax
English taxpayers will see both the personal allowance and higher rate thresholds frozen until 2028 unless there are announcements in the Spring Budget to change that.
As you can see from the table below, the effective tax rate is high in the £100,001 to £125,140 bracket because the personal allowance is reduced by £1 for every £2 of income, effectively increasing the 40% to a punitive 60%.
UK Income Tax on earned income 2023/24 |
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| ||
Tax Band | Range | Effective Tax Rate | ||
Personal Allowance | 0 - £12,570 | nil | ||
Basic Rate | £12,571 to £50,270 | 20% | ||
Higher Rate (no loss of personal allowance) | £50,271 to £100,000 | 40% | ||
Higher Rate (with loss of personal allowance) | £100,001 to £125,140 | 60% | ||
Additional Rate | £125,141 + | 45% | ||
There are some ways to avoid the 60% effective rate such as making pension contributions, gift aided charitable donations, or a combination if the two.
Where you run a business with your spouse it would be wise to look at your profit-sharing arrangement or, if you are self employed and your spouse works in the business, it might be financially beneficial to pay them. However, the wage would need to commensurate with the work they actually do, and it may mean having to set up a PAYE scheme.
You might also want to look at timing of income, where feasible.
2. High Income Child Benefit Charge (HICBC)
Households claiming Child Benefit are taxed heavily where income of the higher earner is in the £50,000 to £60,000 range. As an example, if a parent earned £55,000 with three children, the top £5,000 of income would suffer tax of £2,000 (at 40%) and £1,450.80 HICBC, giving a total cost of £3,450.80. This is an effective combined tax and Child Benefit clawback rate of more than 69%.
There are things which can be done. Examples are making pension contributions and distributing income more evenly with your spouse or civil partner, where possible.
3. Tax-free childcare
The tax-free childcare scheme gives you up to £2,000 per child against this cost per year.
Eligibility is lost if one parent’s income exceeds £100,000. Making pension and gift aid contributions should be considered, especially where income is likely to just tip over £100,000.
4. Using the marriage allowance
If you're a married couple, or in a civil partnership, you may be entitled to claim. Essentially it is of benefit where one of you is a basic rate taxpayer and the other has spare personal allowance. This could save you up to £252 in the 2023/24 tax year and can be backdated for 4 years if you have not claimed in earlier years.
5. Timing of dividends
The £1,000 dividend allowance (the individual’s tax free amount) is set to reduce to just £500 from 06 April 2024. This allowance cannot be carried forward if it is not used, so where there are available profits to distribute this should be used before the end of the tax year where possible.
6. Capital Gains Tax Annual Exempt Amount
Individuals currently can have £6,000 of capital gains before paying tax, this is reducing to £3,000 from 06 April 2024.
It can be advantageous to realise some gains each year to ensure the allowance is used. To reduce a capital gains tax liability it may be possible to realise a loss on an asset to set against gains from another, or by transferring assets between you and your spouse or civil partner before disposal which could potentially give you two annual exempt amounts and two basic rate bands.
If you have been dealing in crypotassets, you will need to review your transactions as HMRC generally treat these as capital assets for tax purposes.
We always recommend seeking advice from a suitably qualified adviser when making investment decisions.
7. Inheritance Tax (IHT)
The nil rate band has been at its £325,000 level since 2009 and will remain so until 2028. With high property prices, increasing numbers of estates are now subject to the tax.
Individuals have an annual tax-free gift allowance of £3,000. Where the allowance was not used for the previous tax year this is carried forward one year. You can gift more than this to your loved ones if you wish but the excess is a Potentially Exempt Transfer. Although it will not give an immediate tax liability it will be taken into account if you die within 7 years of the gift. Making lifetime gifts can be a very useful way to reduce your family’s IHT exposure.
Individuals can also make as many gifts as they wish of up to £250 per recipient.
Gifting out of income is a valuable IHT exemption which is often overlooked. The exemption is only available for gifts made out of surplus net income, not from capital, and must form part of the donor’s normal expenditure.
Whilst reviewing your IHT, we suggest you make sure your Will is up to date and you have organised Lasting Powers of Attorney should you become unable to make decisions yourself. Having these in place make life much easier for your loved ones in very difficult times and ensures that your wishes are carried out. You should also make sure your pension provider has a letter of wishes as to what you would like to happen to your pension pot when you die.
8. Tax efficient investments
For some people, ISAs are a tax efficient way of investing. An ISA is a savings account or an investment in stocks and shares held within a tax-free wrapper. The maximum you can invest in a cash or stocks and shares ISA is £20,000 in 2023/24. This is not carried over if it is unused.
A Lifetime ISA is for those aged between 18 and 40. The maximum amount you can invest per tax year is £4,000. The main appeal of a Lifetime ISA is that the government will add a 25% bonus to the amount you pay in which could mean a top up of £1,000 per year.
To retain the top up, withdrawals must be when you either aged 60 or over, buying your first home or if you are terminally ill.
Junior ISAs can either be cash or stocks and shares. Contributions are limited to £9,000 in 2023/24. With rising interest rates these can shield tax on a child’s interest over £100 on funds gifted from parents as this income would otherwise be chargeable on the parent.
Other investments on which tax relief is available are Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These are specialised and potentially higher risk investments and we would always recommend seeking appropriate advice from a suitably qualified adviser before investing in these schemes.
9. Pension savings
The current lifetime allowance, which is total amount you can have in all for all your pension funds combined, of £1,073,100 is due to be scrapped from 6 April 2024, although a change in government might reverse this. If you have a substantial pension pot, then we believe you should seek professional advice.
There is also an annual allowance for pension contributions which is currently the lower of £60,000 or 100% of your qualifying earnings. There is a reduced annual allowance of between £10,000 and £60,000 for high earners. This is too complex to fully explain here, but please contact us for advice if you think this might apply to you.
Unused allowances for the 3 previous tax years can also be used if you were a member of a pension scheme and did not utilise the allowance in full in those years.
With many of the Income Tax traps we have highlighted, pension contributions can be a really tax efficient way of avoiding them.
10. Reliefs available for employees
As an employee there are a few reliefs that can be claimed in respect of your employment. Examples of things you can claim for are professional subscriptions, having to work from home, mileage paid at less than HMRC’s agreed rate and washing a uniform yourself.
End of year tax planning for businesses
1. Basis period reform for the self-employed
We have written a factsheet on this which you can download here which gives more information about this.
From the 2024/25 tax year onwards sole traders and partners will taxed on profits earned in the tax year so those with a year end which does not fall between 31 March and 05 April will see more than 12 months’ profits taxable in 2023/24. This will accelerate the tax on the additional profits, although these can be spread over 5 tax years.
Please speak to us about your overlap relief and its potential benefits (profits you
may have been taxed on twice because of how the old basis period system worked). You should consider the practicalities of changing your year end to 31 March or 5 April, making calculation of taxable profits simpler. However, for seasonal businesses this may not always be viable as it might give a disproportionate tax result.
You should review capital expenditure especially if the change is going to result in a much higher tax charge.
You might also want to think about succession planning, cessation or partner retirement as tax spreading will not apply once a business has ceased.
Where profits will be higher you should consider the potential tax advantages of personal pension contributions.
2. Annual Investment Allowance
Timing of capital spend on plant and machinery is really important as it reduces your tax liability in the year incurred, so making a purchase (and bringing it into use if on finance) before the year will accelerate your tax relief by a year.
Tax relief on most cars is less generous as you normally only get a writing down allowance, not full tax relief in year one.
However, first year capital allowances of 100% are available on new electric cars with no CO2 emissions. Cars which emit no more CO2 than 50g/km get a writing down allowance of 18%. For those which emit more than 50g/km, the rate is just 6% per annum.
Conclusion
If you want to talk to us about any of the points raised, please get in touch as we are here to help.