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Guide to end of year tax planning

by Oliver Dorrington

With just under two months remaining of the 2022/23 tax year, now is a perfect opportunity to consider actions to improve your tax position.

Pension allowance

For the 2022/23 tax year, you are able to contribute up to £40,000 (gross) into a pension scheme. This allowance may be reduced for any individuals whose income is in excess of £200,000. Please be aware that the amount that you are able to contribute is capped at the individual’s earnings. If you do not have any earnings during the tax year, you are able to make with a maximum net contribution of £2,880 (effectively, £3,600 gross).

Personal pension contributions attract basic rate tax relief at source and therefore the £40,000 gross contribution only requires a £32,000 personal payment.

In addition, the pension contribution increases your basic rate threshold and therefore if you are a higher or additional rate taxpayer you will receive additional tax relief on the contribution made via your tax return.

Furthermore, the pension contributions effectively increase the threshold at which the personal allowance is reduced and Child Benefit is clawed back.

Therefore, if your income is in excess of £100,000 and your personal allowance is reduced, pension contributions can preserve part or all of your personal allowance depending on your circumstances, for anyone with income between £100,000 and £125,140, pension contributions can provide tax relief at an effective rate of 60%.

If you have held a pension scheme in previous years and did not fully utilise your allowance in any of the previous 3 tax years, any unused allowance is available this year. Contributions are first allocated against your current year‘s allowance and then the prior years’ on an earliest first basis. Therefore, any unused allowance from 2019/20 will be lost if not used by 5 April 2023.

Any contributions made by your employer, or your company also count towards your allowance, so these need to be taken into account when making any additional contributions to ensure you do not incur a Pension Savings Tax Charge.

Pensions for all

Pension rules allow contributions to be made by, or for, all UK residents, including children.

So consider making a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even those who do not have earnings.

ISA allowance

The ISA allowance for 2022/23 is £20,000, which can be placed in any combination of cash or stocks and shares ISAs. The junior ISA limit is £9,000. Any income and capital gains received within your ISA is tax free.

This allowance cannot be carried forward, so to utilise the relief, the investment must be made on or before 5 April 2023.

Charitable donations

Gift aid donations work in a similar way to pension contributions in that they are also made net of 20% basic rate tax. This 20% uplift is reclaimed by the charity.

As with pension contributions, gift aid donations increase the basic rate threshold and therefore enable you to claim higher or additional rate tax relief. They also increase the threshold the threshold at which the personal allowance is reduced.

Capital Gains Tax

The Capital Gains Tax (CGT) annual exemption i.e. tax free gains, is £12,300. The exemption is available to each individual, including minor children, but any exemption unused in a year cannot be carried forward. From 6 April 2023, the annual exemption will reduce to £6,000 per individual and from 6 April 2024, this will reduce to £3,000 per individual.

Married couples and civil partners can transfer assets between them on a no gain/no loss basis and such transfers should be considered to ensure that the annual exemption can be fully used.

Where one spouse or civil partner is a higher rate taxpayer but the other will not have used his or her basic rate band in full, similar transfers should be considered to ensure that at least some of any taxable gain is liable at 10% rather than 20% or 18% rather than 28% for sales of residential property.

It is important to ensure that any such transfer is outright and unconditional.

Please be aware that if you sell a UK residential property and a Capital Gains Tax liability arises, you will be required to submit a Capital Gains on UK Property return 60 days following the date of completion.

Inheritance tax

Each tax year you are allowed to gift £3,000 without any Inheritance tax (IHT) implications. Gifts of more than £3,000 made to an individual can later become subject to IHT if you die within 7 years.

Any unused allowance from the previous tax year is also carried forward, and if you did not make gifts of £3,000 in the last tax year, you could gift up to £6,000 before 6 April 2023 with no IHT consequences.

Dividend tax-free allowance

The dividend tax-free allowance is decreasing from £2,000 to £1,000 from 6 April 2023 and again will decrease to £500 from 6 April 2024 while the dividend tax rates are remaining at 8.75%, 33.75% and 39.35% depending on what tax band you fall into. Therefore, ensuring that you have utilised your dividend allowance prior to this change can provide you with some extra tax-free cash.

Care should be taken to ensure that there are reserves available to make a dividend.

Change to the Income Tax rate bands

From 6 April 2023, an individual earning more than £125,140 will pay Income Tax at the additional rate of 45% on any income in excess of this amount. Therefore, if you have not fully utilised your higher rate band during the 2022/23 tax year and your personal allowance has been fully tapered down to nil, you may wish to consider accelerating your income.

If your personal allowance has not been fully tapered down to nil, care should be taken to ensure that you are not effectively paying 60% tax on any accelerated income.

Family business

If you are self-employed or have a family company, consider employing your spouse or taking them into partnership to allow potential redistribution of income. This can help ensure that both your and your spouse’s personal tax-free allowances and basic rate bands are fully utilised.

Arrangements need to be commercial to be effective, and care should be taken around national minimum wage and pension auto enrolment rules.

Tax efficient investments

You can reduce your income tax liability by up to 30% of the amount invested in Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) shares and up to 50% for Seed Enterprise Investment Scheme (SEIS) shares. The maximum investment that can be made per annum on which you can claim income tax relief is £200,00 for VCTs, £100,000 for SEIS and £2 million for EIS as long as at least £1 million of the investment qualifies as knowledge intensive.

Income tax relief is limited to the amount which reduces your income tax liability to nil. An investment in 2022/23 can also be carried back and utilised in 2021/22 if the investment limit for that year was not fully utilised (EIS and SEIS only).

For individuals who have fully utilised their annual or lifetime pension allowances, these investments could provide alternative tax relief.

EIS also offers Capital Gains Tax reliefs, deferring capital gains that you may have incurred on other assets such as land, property, shares etc. SEIS allows for gains up to 50% on other assets in the year, to be exempted from Capital Gains Tax. If your VCT pays dividends, these are exempt from Income Tax and do not need to be reported on your Self-Assessment tax return.

These schemes are designed to help smaller companied raise capital; therefore these investment are generally seen as higher risk. If you would like any further information please contact a member of our Tax and Financial Services team.

This is intended as a summary and overview of the tax situation and does not constitute financial advice. No action should be taken without first seeking professional advice specific to your circumstances.

Information accurate as at February 2023.

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