Happy New (Tax) Year

While it may be human nature to put off tasks until just before a deadline, there are benefits to not leaving your tax planning until the tax year end deadline looms.

We see many clients rush to place money into investments just before the end of the tax year, potentially reducing the amount they could have benefitted by if they’d acted earlier. While last minute deposits are the first chance some individuals may get to use their allowances, for example the £20,000 ISA limit, for others, there are instances where they could potentially have achieved better outcomes by feeding in funds gradually over the course of the year.

Also, with many allowances changing recently, clients cannot always count on allowances and limits that they’ve relied on in the past still being available, at the same rate, in the years ahead. For example, the annual capital gains tax (CGT) exemption is to be cut from £6,000 this April, and then cut again to £3,000 from April 2024.

As we roll into a new tax year, there are several reasons to start planning now for the year ahead. Below are some of the most common tax planning areas that we can assist you with over the next 11 months.

Income tax

Most individuals are entitled to a personal allowance of £12,570, however those with income of £100,000 or more are impacted by the gradual removal of the personal allowance. Broadly for every £2 of income over £100,000, £1 of the personal allowance of £12,570 is lost and is completely lost once total income is £125,140 or more. This means that for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the personal allowance which effectively amounts to a 60% tax rate on income within this range.

In addition, the additional rate threshold has decreased to £125,140. This reduction in the band will no doubt mean that more individuals will find themselves paying more income tax as a result and so there will be greater need for advice. Individuals can consider, for example, making pension contributions and/or making charitable donations or investing in investments which provide income tax relief against their liability.

Marriage allowance – If an individual is a basic rate taxpayer and they’re married or in a civil partnership, they can transfer 10% of their personal allowance to their spouse or civil partner. When combined between a couple, this unused allowance offers an overall tax saving. However, there is a limit to how much can be transferred – this is currently £1,260.

Dividend allowance – The annual dividend allowance has reduced to £1,000. This will be further reduced to £500 in April 2024. There are no changes to the dividend tax rates. However, unlike the personal allowance, every individual is entitled to benefit from the dividend allowance so for some it may be worth restructuring investments to make use of the dividend allowance.

Tax code – Whether you are employed or self-employed, it is vital to ensure that you are on the correct tax code, otherwise you could find yourself paying too much tax. You can contact HMRC or consult an accountant too if there’s any doubt.

Tax efficient investments

Individual Savings Accounts (ISAs) – the annual subscription limit is £20,000. ISAs are exempt from income and capital gains tax, which means they are a tax-efficient way to save. There are four types of ISAs available – cash ISA, stocks & shares ISA, innovative finance ISA and lifetime ISA. Remember, the ISA subscription limit is the total for all ISAs combined.

Growth-oriented unit trusts/OEICs – the rates of income tax are higher than the current rates of CGT, so it can be advisable, from a tax perspective for a higher/additional rate taxpayer, to invest in collectives geared towards capital growth as opposed to income.

Single premium investment bonds – Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance, ignoring any charges. This may appeal to higher/additional rate taxpayers, especially where they are likely to pay tax at a lower rate in the future.

Enterprise Investment Scheme – an investment of up to £1 million (or £2 million provided anything above £1 million is in knowledge-intensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available provided some of the EIS investment potentially qualifies for income tax relief.

Venture Capital Trust – offers income tax relief at 30% for an investment of up to £200,000 in new shares, again with tax relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are tax free, so, again, these investments may appeal to higher/additional rate taxpayers.

Capital gains tax

The capital gains tax (CGT) annual exemption has reduced to £6,000. This will effectively mean that more individuals will find themselves paying CGT on their capital gains which will equally mean careful planning will be required to ensure gains are within the exemption.

Further, those who may have made capital losses in previous tax years ought to take action to report them to HMRC – the individual has up to 4 years after the end of the tax year that they disposed of the asset to report the loss. This can either be done via self-assessment or by writing to HMRC.

Corporation tax

The 19% rate applies to the first £50,000 of profits and a marginal rate of 26.5% applies to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate does not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax is 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)

These changes may offer great opportunities around remuneration and other profit extraction strategies, as well as sale and succession planning.

Pensions

Annual allowance – making use of pension allowances will help you to build up savings with generous tax reliefs. The threshold is now £60,000 for most individuals, with the ability to use carry forward for up to three years for any unused allowances.

For high earners the tapered allowance may apply but the minimum allowance has increased from £4,000 to £10,000 and many will see their allowances increase by significantly more.

The Money Purchase Annual Allowance has also increased from £4,000 to £10,000 providing scope for those who have flexibly accessed their pension benefits to boost their pensions savings.

Lifetime allowance – the Lifetime Allowance (LTA) charges have now been removed. This provides opportunities for those previously restricted by the LTA to recommence or increase their contributions. Even those with Fixed or Enhanced protection can make further contributions without impacting any tax-free entitlements.

However, it is important note that any funding for individuals in this position will need to consider the risk that a future Government may well re-introduce the charge.

Inheritance tax

The freeze on the inheritance tax (IHT) thresholds continues and is expected to stay until 2028. The current nil rate band threshold is £325,000 and the residence nil rate band is £175,000. Remember that the residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2 million, so individuals ought to consider their own circumstances and consider whether they can plan to prevent any lost residence nil rate band. This will no doubt mean that more and more individuals will be brought into the IHT net, so planning in this area is likely to become of more importance.

If you would like to discuss the above in more detail, please contact us here.

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Sources: Techlink and Professional Adviser.