Tax year end planning checklist for individuals – 2022/23 tax year

As well as considering tax planning for the current tax year, it is important to put in place strategies to minimise tax throughout the next tax year. The majority of planning strategies have greatest effect if implemented before a tax year begins.

This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2022/23 tax year and to plan ahead for 2023/24.

You can also download our GUIDE TO YEAR END TAX PLANNING 2022/23 and our 50 TAX PLANNING TIPS 2023/23 from our news page.

Income tax

• Reduce taxable income below £150,000 to avoid 45% tax. Pension contributions are one of the few ways to reduce taxable income
• For married couples / civil partners, ensure each of you has sufficient income to use your personal allowance: £12,570 in 2022/23. This will remain at that level until 5 April 2026
• The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000. If income is above £100,000, then individual pension contributions before 6 April 2023 can reduce income to £100,000 to restore all or part of a 2022/23 personal allowance which would otherwise be lost
• Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment
• Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual’s income without top slicing when assessing entitlement to the personal allowance
• Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond

Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.

Capital gains tax

The term “capital gains tax planning”, in this context, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:

• timing of the transaction, e.g. bringing the transaction forward or delaying it;
• ensuring that full advantage is taken of all available exemptions and reliefs;
• depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse / civil partner or the use of a trust;
• using the annual exempt amount; and
• making full use of any available losses

An explanation of the key CGT planning points for married couples/civil partners and individuals under the age of 18 can be found here.

Capital gains tax planning:

• Maximise use of this year’s annual exemption (currently £12,300). Any amount unused cannot be carried forward – “use it or lose it”
• To defer the payment of tax for a year, make a disposal after 5 April 2023
• To use two annual exemptions in quick succession, make one disposal before 6 April 2023, and another after 5 April 2023
• Try to ensure each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this

Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss).

It should also be borne in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time, if the completion date was between 6 April 2020 and 26 October 2021; 60 days for disposals completed on or after 27 October – please see HMRC’s guidance.

In the March 2021 Budget, the Government announced that the annual capital gains tax exemption would be frozen at £12,300 until 5 April 2026.

Inheritance tax

• Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2023
• The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax, provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption
• For those who have income that is surplus to their needs, it may also be appropriate to establish arrangements whereby regular gifts can be made out of income in order to utilise the normal expenditure out of income exemption. An ideal way of achieving this is to pay premiums into a whole of life policy in trust to provide for any inheritance tax liability

Again, in the March 2021 Budget, the Government announced that the inheritance tax nil rate band and residence nil rate band would be frozen at £325,000 and £175,000 until 5 April 2026, and the residence nil rate band taper will continue to start at £2 million. Therefore, as wealth continues to rise, planning to mitigate inheritance tax should be started as early as possible.

If you can afford to make substantial gifts out of income, you may like to get that planning up and running sooner rather than later in case any rule change occurs in future – in the hope that if a rule change does occur, existing arrangements will be protected.

Savings and investments

Savings income and dividends

• For married couples / civil partners ensure each of you has sufficient savings income to use your £500 or £1,000 personal savings allowances, and sufficient dividends to use your £2,000 dividend allowances
• Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in tax year 2022/23
• The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so in 2022/23 people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £17,570. However, if you do qualify, ensure you have the right type of investment income (e.g. interest) to pay 0% tax
• Where interest is due just after 5 April 2023, closing an account just before the tax year end can bring that interest forward to the 2022/23 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year

ISAs and JISAs

• Annual subscriptions (£20,000 and £9,000 respectively) should be maximised before 6 April 2023 as any unused subscription amount cannot be carried forward. The annual ISA and JISA subscription limits remain at £20,000 and £9,000 for 2023/24

EISs/VCTs

For subscriptions to be relieved in tax year 2022/23, they must be made before 6 April 2023:

• EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. Maximum income tax relief is 30%. Unlimited capital gains tax deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2021/22 it must be paid before 6 April 2023
• VCTs – Up to £200,000 can be invested. Maximum income tax relief is 30%. No ability to defer capital gains tax, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free

It is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.

Investment bonds

• Investment bonds can deliver valuable tax deferment. To minimise taxation on encashment, consider deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or you are a basic rate taxpayer. In the meantime, if cash is required, you can use the 5% tax-deferred annual withdrawal facility. (Alternatively consider assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment)
• Or, it may be worth triggering a chargeable event gain before the end of this tax year, by full encashment/surrender, so that the liability to tax falls in 2022/23, if you anticipate that your top tax rate in 2023/24 will be greater than this year’s. (Note that the timing of the chargeable event depends on the way in which the chargeable event gain is triggered. Chargeable event gains in respect of partial withdrawals are triggered at the end of the policy year, whereas chargeable event gains on full policy encashments/surrenders are triggered on the actual date of the event)

Pensions

• The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. This means that 5 April 2023 is the last opportunity to use any unused allowance of up to £40,000 from 2019/20
• In 2020/21, the Chancellor added £90,000 to the two income thresholds that govern the tapering of the annual allowance. So, in 2022/23, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000 respectively. This means more pension savings and the possibility of avoiding a tax charge. For high earners, however, it is still important to check if you are likely to be subject to the tapered annual allowance and whether there is anything you can do about it. If you have sufficient carry forward and your threshold income is only just above £200,000 for 2022/23, making additional individual pension contributions could reinstate your whole 2022/23 annual allowance. Note that the minimum the taper can take the annual allowance down to is £4,000.
• The personal allowance reduces by £1 for every £2 for those with adjusted net income in excess of £100,000. Making extra pension contributions not only increases pension provision, but for those who may be subject to a reduced personal allowance, a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice
• In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Benefit is totally lost when income reaches £60,000
• The changes to the death benefit rules on pensions from 6 April 2015 should have prompted a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not been done, now is the time. In theory a person’s pension plan could provide income for future generations, as beneficiaries will be able to pass the remaining fund to their children and so on down the line
• Individuals should consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax-free returns
• In the March 2021 Budget, the Government announced that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026. Individuals who have funds close to or exceeding the lifetime allowance may need to review any previous decisions in respect of continuing to fund their pensions and or deferring crystallising their benefits based on the expectation of inflationary increases

If you would like to discuss your options ahead of tax year end, please contact us here.

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Source: Techlink