End of year tax planning – Have you utilised all your tax reliefs and allowances
It has certainly been a turbulent year. With quite significant changes ahead, tax planning is important for business owners and individuals alike to ensure all opportunities have been considered before the new tax year begins. It is also a good time to review your finances generally. We do not know what the Spring Budget will bring when it is delivered on 15 March but one thing the last few months has taught us is that tax can change rapidly.
Please read on for some areas to consider.
Personal Allowance is frozen for 2023/24 (and until 2028)
45% Additional Rate Income Tax Threshold lowered from £150,000 to £125,140 from 2023/24
The Dividend Allowance is halving to £1,000 in 2023/24 (and to just £500 in 2024/25)
The Personal Allowance of £12,570 is a ‘use it or lose it’ allowance. You should aim to use your allowance before 05 April 2023, where possible.
We generally recommend a low salary, high dividend profit extraction policy for our owner managed corporate clients. This tops up a director’s National Insurance record and the company gets tax relief for the cost of the salary. Higher salaries tend to be less tax efficient due to employee and employer National Insurance contributions.
Punitive tax bands
The point at which individuals pay the 45% Additional Income Tax Rate is being lowered from £150,000 to £125,140 from 06 April 2023. This will bring many more taxpayers into this bracket and will also mean them losing their Personal Savings Allowance. For someone earning over £150,000 with savings interest exceeding £500, this will result in additional Income Tax of £1,468 in 2023/24 compared to the current tax year.
Income in the £100,000 to £125,140 bracket is already taxed heavily as the Personal Allowance is withdrawn by £1 for each £2 of income in that band, effectively increasing the tax rate by 50%. For example, earned income in that range is taxed at 60%.
Those households claiming Child Benefit are also hit hard where the income of the higher earner is in the £50,000 to £60,000 range. As an example, if earnings were £55,000 and you claimed Child Benefit for three children, the £5,000 of income sitting in this band would suffer tax of £2,000 (at 40%) and £1,318.20 of your child benefit would be clawed back giving a total cost of £3,318.20. This is an effective combined tax and Child Benefit clawback rate of more than 66%.
Please speak to us as there may be something which can be done to minimise your liabilities. Examples include pension contributions (either personal contributions or salary sacrifice), salary sacrifice tax efficient benefits such as electric vehicles, and varying the timing of income, where possible.
Have you utilised your 2022/23 Dividend Allowance of £2,000 which, unlike the Savings Allowance, is not restricted for higher earners?
Dividend timing will be key especially if it will sit in one of the punitive tax bands mentioned above. However, there needs to be profits available from which a dividend can be voted. Please speak to Adam who will be happy to advise you on your dividend policy.
Tax savings for couples
The Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner which reduces their tax by up to £255 in the tax year. Claims can only be backdated for four years, so any claim for the 2018/19 tax year would need to be submitted by 05 April 2023. This only works where one of you is wasting your Personal Allowance and the other is not a higher or additional rate taxpayer.
Please ensure you keep us up to date with any changes to your circumstances.
There are potential Income Tax savings from transferring income producing assets to a spouse or civil partner with a lower marginal tax rate. If you are neither married nor in a civil partnership transfer of assets between you could give rise to a Capital Gains Tax charge, so please make sure you get advice about the tax consequences first.
Examples of how restructuring your joint finances may benefit you:
£2,000 Dividend Allowance (£1,000 in 2023/24)
Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers, nil for Additional Rate taxpayers)
0% Starting rate of income tax for savings income of 0% when one spouse has very little earned and pension income
£1,000 Property Income Allowance
Potential reduction in Child Benefit Clawback - £50,000 individual (not joint) income threshold
Pension contributions and charitable donations
You can contribute to a personal pension up to the amount of your earned income subject to an annual limit of £40,000 (which is made up of the taxpayer’s contribution of £32,000 and the top up tax relief from HMRC of £8,000) but please note this limit is tapered down to a minimum of £4,000 for those with threshold income over £200,000 or adjusted income over £240,000 (the definition of these terms is too complex to explain here). Where a taxpayer has gone into drawdown and taken tax free cash the annual limit is also just £4,000.
Unused annual allowances can be carried forward for up to 3 years where you have an existing pension. If you do not have a pension but are not in a position to invest now but think you might want to use the carry forward allowance in the next three years, you can unlock this relief by paying a small contribution now thus creating unused allowances.
You could also consider sacrificing part of your salary to be replaced by an employer pension contribution, which can be very tax efficient, especially if your income reduces your personal allowance, you pay the High Income Child Benefit Charge or you are an Additional Rate taxpayer.
We would always recommend you seek professional advice before accessing a pension.
Charitable donations are often overlooked. If you are higher rate taxpayer, please take time to make sure the donations you have gift aided are included on your tax return, so you can benefit from the additional tax relief due.
Tax efficient investments
ISAs are free from both Income Tax and Capital Gains. More details about these are given in a separate article in our February 2023 newsletter.
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.
Capital Gains Tax
Annual Exempt Amount is reducing from £12,300 in 2022/23 to £6,000 in 2023/24
Annual Exempt Amount to be further reduced to £3,000 in 2024/25
Timing of disposals can be key to minimising tax payable. For UK residents delaying a gain into a later tax year (other than that on a residential property which has to be reported and paid within 60 days of completion), will delay the tax by one year but, with the reduction in the Annual Exempt Amount, is likely to significantly increase your tax liability.
If you have assets which stand you at a loss, disposing of those to create a taxable loss to offset against other gains can be a useful way of minimising Capital Gains Tax.
The overall tax liability can also sometimes be reduced by transferring half of an asset to a spouse or civil partner before disposal, but please speak to us first.
The large reduction in the Annual Exempt amount from £12,300 to £6,000 and then £3,00 the following year will undoubtedly mean more taxpayers having to pay the tax in future.
Inheritance Tax (IHT)
Nil rate band frozen until 2028
Increasing numbers of estates are now paying IHT
The nil rate band has been at its £325,000 level since 2009 and will remain so until 2028. With rising 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 not specifically related to the tax year end planning, this gives us an opportunity to 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 for yourself. Having these in place make life much easier for your loved ones in very difficult times and also 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.
Corporation Tax and Business
It has been announced that the £1m Annual Investment Allowance is to be made permanent but this still has not been legislated for at the time of writing
130% Super-Deduction ends on 31 March 2023
Main rate of Corporation Tax increases to 25% on 01 April 2023
Following one of the U Turns in the Autumn statement, it was announced that the main rate of Corporation Tax will increase from 19% to 25% from 01 April, 2023 as originally planned.
Taxable profits below £50,000 will continue to be taxed at 19%. Profits in the £50,000 to £250,000 band will be taxed at 26.5%, because of how marginal relief works. Profits over £250,000 will be taxed at 25%. Where accounting periods straddle 1st April 2023, profits will be time apportioned so the company will pay tax at the new rate for the portion of profits after 01 April 2023.
With rising tax rates, tax planning becomes more pertinent. It might make financial sense to accelerate profits where possible to benefit from the lower Corporation Tax rate in 2022/23 or defer expenditure in order to obtain tax relief at the higher rates. Costs such as repairs, training costs or bonuses could potentially be delayed.
Seasonal businesses might benefit from a change in accounting date if much of the profit is earned before the rate changes in April. This would separate the two periods and avoid the higher tax charge resulting from the mixture of pre and post 01 April 2023 rates.
The Super-Deduction will end on 31 March 2023 which uplifts tax relief on qualifying capital expenditure to 130%. The super deduction gives approximately the same tax relief as expenditure incurred after 01 April 2023 for those companies paying Corporation Tax at 25%.
It is quite surprising that although it was announced back in September that the £1m Annual Investment Allowance for qualifying plant was to be made permanent, this is yet to find its way into the legislation. We are trying to seek clarity if this is in the process of being legislated. If it is not, it will revert back to £200,000 from April 2023.
If you would like to discuss how these changes are likely to impact your business, please speak to our managing director, Adam Dutton. Please telephone him on 01756 799823
We are here to advise you. Please do not hesitate to get in touch to discuss any of the points raised.