2022/23 Year End Tax Planning Guide
13th March 2023
With less than a month to go before the end of the tax year, now is a good time to review your finances and ensure you are taking maximum advantage of any available tax allowances and reliefs. From 6th April 2023, some of these reliefs become less generous, so think about how those changes may impact you and suitable action you can take now.
What do you need to think about between now and 5th April 2023?
In this article, we share a selection of ideas and suggestions to consider before the 2022/23 tax year comes to an end. Not all of the points will be relevant to your circumstances, so please get in touch to discuss what you can do to improve your tax position, both now and in the future. Detailed advice should be sought before certain suggestions are implemented.
Staying up to date with the relevant tax rates and thresholds is important for knowing what allowances and reliefs you can benefit from.
The standard personal allowance is £12,570 (2022/23), which is the amount of income you can receive without paying any tax. This is reduced by £1 for every £2 that your ‘adjusted net income’ exceeds £100,000, and by the time your income is £125,140 or above, there is no personal allowance left.
A quirk to the gradual withdrawal of the personal allowance is that if your income falls between £100,000 and £125,140, you are taxed at an effective rate of 60%. Those in this income bracket should consider how charitable donations under the Gift Aid scheme and/or pension contributions may reduce income to below these levels, and outside of the 60% tax trap.
From 6th April 2023, we will see more people falling into the additional rate income tax threshold as this will be lowered from £150,000 to £125,140, bringing more income within the highest income tax rate of 45%. If this affects you, before the reduction happens, consider if it’s possible to bring forward income ahead of the new tax year.
Note, income tax bands are different if you live in Scotland.
If you own a company, check if you have made full use of the current tax-free dividend allowance of £2,000 before the end of the tax year. The dividend allowance halves from £2,000 to £1,000 from 6 April 2023, and then halves again to £500 in 2024/25. If you are a shareholder director and the company has profits available to distribute, chat to us about whether paying a dividend before the end of the year is the most tax-efficient route for you (there are certain factors to consider).
Parents claiming child benefit should be mindful of the High Income Child Benefit Charge. If your taxable income (or that of your partner) exceeds £50,000, there is a clawback of the child benefit at a rate of 1% of the benefit for every £100 of income over £50,000. The financial benefit of claiming this allowance is lost entirely where individual taxable income exceeds £60,000. Making personal pension contributions or exchanging salary in return for employer pension contributions may reduce your taxable income to keep it below the threshold.
Low earners may be able to transfer up to £1,260 of their personal allowance to their spouse or civil partner, saving up to £252 in the tax year. This allowance can be backdated for up to four tax years and can also be claimed by a surviving spouse on behalf of their deceased partner. The transfer is not available where either spouse or civil partner is a higher or additional rate taxpayer.
Savings and investments
Make sure you’re not paying more tax than necessary by making use of the relevant annual allowances for savings and investments.
The Personal Savings Allowance (PSA) means basic rate taxpayers will not pay tax on the first £1,000 of savings interest, reducing to £500 for higher rate taxpayers. Additional rate taxpayers pay tax on all savings interest. If your spouse or civil partner pays less tax than you, consider if putting your savings in their name could reduce your tax bill.
Think about tax-efficient investments such as Individual Savings Accounts. Annual subscriptions for ISAs and JISAs should be maximised before the end of the tax year. You can invest up to £20,000 into an ISA, as well as up to £9,000 per child (or grandchild) into Junior ISAs. Unused subscription amounts cannot be carried forward.
Experienced business owners and investors may wish to explore the tax benefits offered by schemes such as the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
Capital Gains Tax (CGT)
Every year, you are entitled to a tax-free allowance for capital gains, but we are about to see the annual exemption fall quite dramatically.
In the current tax year, you can realise capital gains up to the annual exempt allowance of £12,300 without incurring a tax charge. However, the annual exemption will reduce to £6,000 from 6th April 2023 (and reduces further to £3,000 from April 2024). The annual exemption cannot be carried forward or transferred, so consider making disposals before 6th April 2023 to benefit whilst it’s still at the higher level.
If you realise capital gains and losses in the same tax year, the losses are offset against the gains before the annual exemption is deducted. Consider postponing a disposal that will generate a loss until the following tax year, or look to realise more gains in the current year to offset the loss. Don’t forget about any capital losses brought forward too.
Consider transferring assets to your spouse or civil partner on a no gain/no loss basis to utilise their annual exemption, or capital losses. The transfer must be outright and without preconditions to ensure no CGT implications.
Look to maximise your tax relief when it comes to your pension savings. The benefits are especially valuable for higher and additional rate taxpayers.
The standard amount that individuals can contribute to a pension each year is £40,000 (the ‘annual allowance’), together with any unused relief in the prior three tax years.
Consider making additional contributions to your pension scheme before the end of the tax year to obtain higher or additional rate tax relief (though be careful not to breach your available annual allowance or the lifetime allowance). Seek advice, if necessary.
High earners may be subject to the tapered annual allowance. This is where the standard annual allowance of £40,000 for pension contributions is reduced by £1 for every additional £2 of an individual’s ‘adjusted income’ over £240,000. The maximum reduction is £26,000, so anyone with an income of £312,000 or more has an annual allowance of £4,000. If you are caught by the restriction, any pension contributions in excess of the available annual allowance will be subject to the annual allowance charge. Note, the tapered reduction does not apply to anyone with ‘threshold income’ of £200,000 or less.
If you have accumulated a large pension pot, the lifetime allowance of £1,073,100, be aware that you pay tax on anything above the limit. If you are close to the limit, take advice on contribution levels.
Individuals may want to consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for family members who do not have relevant UK earnings. The uplift from the government (in the form of basic rate tax relief) of £720 is a significant benefit.
Inheritance Tax (IHT)
If your beneficiaries will likely pay IHT when you die, consider using your gift allowances during your lifetime to reduce your estate.
Everyone has an annual gifts exemption of £3,000 per annum (£6,000 if no gifts were made in the previous tax year). On top of this, you can make as many outright gifts of up to £250 per individual per tax year with no IHT consequences (provided that the recipient does not also receive any part of the £3,000 annual gifts exemption). Gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else) and gifts made out of surplus income can also be made free of IHT.
Consider increasing bequests to charities to 10% of your net estate in order to reduce the IHT rate from 40% to 36%. Talk to us about how to carefully draft your Will to ensure the desired effect is achieved.
If you haven’t got a Will in place yet or your existing Will needs updating, we can help you. Our Will writers are also tax advisers so we will work out the most tax efficient way to do things so your beneficiaries do not find themselves paying any more tax than they have to.
Would you like to talk through your options?
With the end of the tax year on the horizon (5th April), it is crucial that you consider your position as soon as possible to make the most of reliefs and allowances. If you need help understanding your options and how you can improve your tax position, please contact a member of our friendly team who will be happy to help.
This article represents our understanding of the law and HM Revenue & Customs’ practice as at 13 March 2023. It should not be construed as advice or a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances.
No action should be taken without seeking further formal advice. Where suggestions relate to investments or pensions, please seek advice from an Independent Financial Adviser.