5 April 2023, marking the end of the 2022/23 tax year, is right around the corner, placing a hard deadline on certain planning opportunities that utilise ‘use it or lose it’ tax allowances. Tax planning can be a complicated subject at the best of times; however, a myriad of new allowance amounts following a flurry of Government policy changes (and U-turns) does not make the subject easier.
What are the tax allowances and where are they going?
The main personal tax allowances are either being reduced or have been frozen. With a stricter tax regime, alongside uncertain investment markets, the significance of managing your affairs in a tax-efficient manner is more important than ever.
Below is a brief reminder of some of the notable planned changes. The following allowances have been frozen and will remain the same for the 2023/24 tax year:
Personal Allowance – £12,570
Pension Annual Allowance – £40,000
Pension lifetime allowance – £1,073,100
Individual savings account (ISA) & junior ISA (JISA) allowances – £20,000 & £9,000 respectively
Inheritance tax nil-rate band – £325,000
Residence nil-rate band – £175,000
While asset prices and average pay continue to rise, a freeze on an allowance is often seen as a stealth tax, as more people exceed the above allowances and fall into higher rates of tax.
The following reductions are also expected for 2023/24:
Capital gains tax (CGT) annual exempt amount – reduced from £12,300 to £6,000
Dividend Allowance – reduced from £2,000 to £1,000
Additional/top rate for income tax – reduced from £150,000 to £125,140
Of course, this list is not comprehensive of the upcoming changes and we are already aware of further planned reductions in future tax years, as well as changes to the rate at which certain taxes are calculated. Mattioli Woods are not tax advisers but the above frames the environment in which we carry out financial planning.
The overriding message when aiming to create a tax-efficient position is to make the best use of the available allowances, as well as tax wrappers, such as pensions and ISAs.
Simple planning for the whole family
For couples who are married or in a civil partnership, there are several measures that could be taken to make the best use of the Personal Allowance, at which income is taxed at 0%.
Marriage Allowance – lets you transfer 10% of the Personal Allowance (£1,260) to your partner. This is useful if one of you in the relationship is not in receipt of any taxable income.
Inter-spouse transfers – lets you transfer assets to your partner without being subject to a capital gain or inheritance tax charge. It is sensible to utilise both sets of allowances the couple is entitled to.
This may be a transfer of an income-bearing asset to the individual, subject to a lower rate of tax. This is also helpful for the transfer of an asset that is subject to capital gains to the individual not utilising their capital gains allowance in that tax year.
Using the family business
Make use of tax wrappers
Simply put, a tax wrapper is an account that wraps around your savings to provide tax benefits, as long as the money stays within the account.
ISA
When subscribing to an ISA (or even a JISA for a child), it is generally a good idea to do this earlier rather than later in the tax year. This allows increased time for investments to grow or cash to earn interest, both free of income and capital gains tax.
This can be automated through a Bed & ISA strategy, whereby the annual subscription from an investment account is made automatically, thus removing funds from a taxable environment. This can typically utilise some of your CGT annual exemption as mentioned above, killing two birds with one stone. Active advice is increasingly important against the backdrop of changes to the capital gains and dividend allowances as mentioned.
Pension
Penson contributions are usually considered following the calculation of annual income and business profits, so this naturally occurs later in the tax year.
For individuals with taxable income over £100,000, your Personal Allowance is reduced by £1 for every extra £2 you earn over this threshold. Effectively, this means income between £100,000 and £125,000 falls into the 60% tax-rate trap. Pension contributions are a potential solution to reduce taxable income below £100,000.
