Each year, as the 5 April approaches and the end of the financial tax year draws to an end, it’s important that you ensure your finances are as tax efficient as possible. Nottingham chartered accountants Clayton & Brewill provides some year end tax planning tips.
Income tax – do you need to reorganise your income and assets?
Consider reorganising how income and assets are split between you and your spouse to take advantage of personal allowances (currently £12,570) and minimise any higher and additional rate tax (income over £150,000 is taxed at 45%). Consider savings allowances, pension contributions and married couples allowance.
Dividends – take advantage while you can
If you are a business owner or hold investments, ensure you take advantage of the £2,000 dividend allowance; this means you won’t pay tax on the first £2,000 of dividends that you receive in the tax year.
Capital Gains Tax – have you used your allowance?
The Capital Gains Tax (CGT) annual exemption for 2022/23 is £20,000. If you haven’t already used your exemption, do you have any assets you need sell or transfer before 6 April? If you’ve already used it and need to sell or transfer assets, wait until after 6 April. Consider whether transferring assets between you and your partner might save tax prior to any disposals, as well as Business Asset Disposal Relief (formally Entrepreneurs’ Relief) and whether your assets qualify for the lower 10% rate of CGT.
Investments – review to maximise your allowances
Review your investments to ensure you’re taking advantage of income tax, dividend and CGT advantages.
Everyone is entitled to an Individual Savings Account (ISA) allowance of £20,00. There is also a Junior ISA allowance for children under 16. Also consider other investment options such as the Enterprise Investment Scheme (EICS), SEED Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs), although it’s important to ensure you seek advice as these often carry a higher risk.
Pensions – use your annual allowance
The maximum annual allowance for pension contributions is £40,000 and includes contributions made by both individuals and employers.
You’ll have a reduced (‘tapered’) annual allowance in the current tax year if both:
- your ‘threshold income’ is over £200,000
- your ‘adjusted income’ is over £240,000
Ensure you use your annual allowance. Also, if you haven’t contributed up to the annual allowance in previous years, you may be able to carry forward any unused amount.
The pension lifetime allowance (LTA) is currently £1,073,100. If your pension fund is worth more than this, it’s worth exploring whether you are eligible to apply for protection.
IHT – use your reliefs
Inheritance Tax (IHT) can be charged at 40% on your estate and on gifts you’ve made. There are IHT reliefs available, but it’s important that you use them. Each year you can make gifts of up to £3,000, which are exempt from IHT. If you haven’t used your previous year’s allowance, you may be able to claim it.
The nil rate band is currently £325,000 and it will remain fixed at this amount until April 2026. The Government also introduced the residence nil rate band in 2017 as an additional amount that could be passed on tax-free against the value of the family home. The residence nil rate band is currently £175,000 – check if you qualify.
Although not directly related to year end planning, now is also a good time to review your will to ensure it meets your wishes.
Charitable giving – don’t forget to claim your tax relief
If you have made charitable donations and made a gift aid declaration, you may be able to claim up to 25% in tax relief. This can potentially reduce your higher rate tax amount.