End of tax year planning – Getting to grips with the basics
As the end of the tax year approaches, now is the perfect time to ensure you have your financial affairs in order and to double-check that you’ve taken advantage of all the tax-efficient allowances available to you.
You can contribute as much as you like into your pension, but there is a limit on the amount of tax relief you will receive each year.
This annual allowance is currently £40,000. An individual can’t use the full £40,000 Annual Allowance where ‘relevant UK earnings’ are less than £40,000, although your employer still could. You may be able to, however, carry forward unused allowances from the past three years, provided you were a pension scheme member during those years.
Threshold Adjusted Income limit is £200,000 and the Adjusted Income Limit is £240,000. If your income plus pension contributions exceeds the Adjusted Income Limit, your Annual Allowance is reduced by £1 of every £2 you are over the Adjusted Income Limit.
A Lifetime Allowance also places a limit on the amount you can hold across all your
pension funds without having to pay extra tax when you withdraw money. This limit
is currently £1,073,100.
If you have children under 18, a spouse who does not work, or who may not be earning enough to pay Income Tax, you can invest into a pension for each of them. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, would amount to £3,600 a year.
YOUR INDIVIDUAL SAVINGS ACCOUNT (ISA) ALLOWANCE
The ISA allowance is £20,000 for the 2022-23 tax year. You can put all the £20,000 into a Cash ISA, or invest the whole amount into a Stocks and Shares ISA or Innovative Finance ISA. You can also mix and match, putting some into Cash, some into Stocks and Shares and the rest into Innovative Finance if you wish. However, the combined amount can’t exceed your annual ISA allowance. With pension contributions subject to annual and lifetime limits, ISAs represent an excellent way of topping up retirement income. There is no Income Tax or Capital Gains Tax (CGT) payable on ISA proceeds. You cannot carry over your ISA allowance once the tax year has ended.
In certain circumstances, investors can use existing holdings to open or top up their ISAs, this arrangement is known as a Bed & ISA. This is a way of transferring assets held outside an ISA into an ISA so that future investment income and growth are sheltered from tax. The investments are sold, cash is transferred into the ISA and the investments are repurchased. Charges apply and you could end up with a CGT liability if the gain you make on selling the asset together with any other taxable gains you make within the tax year exceeds the annual CGT allowance.
A Lifetime ISA is another option available.
JUNIOR ISA CONTRIBUTIONS
Junior ISAs are a tax-efficient way to build up savings for your children (and grandchildren) and can be opened for any child under 18 living in the UK. The money can be held in cash and/or invested in stocks and shares.
They work in exactly the same way as your own ISA, however, the maximum investment is £9,000 per child.
GIFTING FOR INHERITANCE TAX (IHT) PURPOSES
You can make gifts worth up to £3,000 in each tax year. These gifts will be exempt from IHT on your death. You can carry forward any unused part of the £3,000 exemption to the following year but if you don’t use it in that year, the exemption will expire.
Certain gifts don’t use up this annual exemption, however, there is still no IHT due on them e.g. wedding gifts of up to £5,000 for a child, £2,500 for a grandchild (or great-grandchild) and £1,000 to anyone else. Individual gifts worth up to £250 are also IHT-free.
These are relatively small sums, but you should use these up where possible to gradually reduce your overall estate.
USING YOUR CGT ALLOWANCE
Every individual is entitled to a CGT annual allowance which is currently £12,300 (£6,150 for trusts). You can’t carry forward this relief and so you may look to crystallise gains up to this amount before the end of the tax year. Capital losses can also be used to offset gains.
Above the CGT allowance, basic rate tax-payers selling investments would pay CGT at 10%, with higher rate tax payers paying at 20%.
Spouses have two annual exemptions between them and can take advantage of the rules allowing assets to be gifted with no CGT implication until the asset is subsequently disposed of.
The CGT allowance will be reduced from £12,300 to £6,000 from April 2023 and £3,000 from April 2024.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
In addition to simpler tax planning ideas, there are other more complex areas, such as VCTs and EISs, which are tax year end sensitive.
These are traditionally higher risk investments but can offer up to 30% tax relief and provide portfolio diversification.
EISs – maximum investment of £1m (or £2m as long as at least £1m of this is invested in knowledge intensive companies) with 30% tax relief provided the investment is held for 3 years, gains are also exempt from CGT provided they have been held for 3 years.
VCTs – maximum investment of £200,000 with 30% tax relief provided the investment is held for 5 years, gains exempt from CGT, conditions apply.
USING YOUR DIVIDEND ALLOWANCE
For the current tax year, investors can earn up to £2,000 in dividend income tax-free.
How much tax you pay on dividends above the Dividend Allowance depends on your Income Tax band:
- Basic rate 7.5%
- Higher rate 32.5%
- Additional rate 38.1%
The Dividend Allowance reduces from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024 for individuals who receive dividend income.
The information contained in this guide is based on our understanding of current allowances and rates at 6.12.22, which could be subject to change.
WE’RE HERE TO HELP
With the tax year-end imminent, please get in touch with us as soon as possible if you have any questions or want to discuss any aspect of your end-of-year tax planning. We look forward to hearing from you.
*It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this
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