As we hurtle towards the end of the tax year, now is the perfect time to ensure you have your financial affairs in order with year-end tax planning and to double check that you’ve taken advantage of all the tax-efficient allowances available to you.
What do we mean by year-end tax planning?
Year-end tax planning involves undertaking a 360° review of your financial situation and identifying opportunities to minimise the amount of tax you will need to pay. Understanding your options and making the most of them is essential, as there may be some carry-forward opportunities you are unaware of. Our team will be able to help you assess your position and help determine the best year-end tax planning strategies.
Edge Tax Year-end Tax Planning Tips
Is your pension the most tax-efficient it can be? Saving for retirement should always be considered as part of your year-end tax planning process.
Contributions to pension funds within the annual allowance and the overall lifetime limit attract relief at your marginal rate of tax. The combination of tax relief on contributions, tax-free growth within the fund, and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings option.
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 in a pension for each of them. The maximum annual contribution you can currently make on their behalf is £2,880 which, along with tax relief, would amount to £3,600 a year.
- Making the most of Indiviudal Saving Accounts (ISA)
ISAs aren’t just for you, but are for other members of your family. They can be used by parents and grandparents to transfer funds to younger generations and assist with helping children save for the future, and are a great year-end tax planning tool.
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 an Innovative Finance ISA. You can also mix and match you investment allowance.
Junior ISA contributions work in exactly the same way as your own ISA but the maximum investment is £9,000 per child. They are a great way to build up savings for your children/grandchildren. The money can be held the same as an adults ISA
Any returns are free from capital gains tax and income tax so make sure you’re taking full advantage of these allowances on your savings as part of your year-end tax planning
- Reduce your Inheritance Tax Burden
There are a number of tax reliefs available each year on Inheritance Tax (IHT). You can make annual gifts worth up to £3,000 each tax year which are exempt from IHT and remain so even on the event of your death. You can carry forward any unused part of the £3,000 to the following year but if you don’t use it in that year it will expire.
There are gifts that don’t count as this exemption, however there is still no IHT due on them e.g. wedding gifts of up to £5,000 for a child or £2,500 for a grandchild, and £1,000 for anyone else. You can also gift £250 to as many people as you like, once per year and gifts to charities are also exempt
Whilst these are relatively small amounts, over time they will reduce your estate and overall IHT liability.
- Gift Aid
This is a valuable relief for gifts to charities: the gift is made out of the taxpayer’s taxed income and the charity benefits by claiming basic rate tax on the value of the gift. Further relief is available to higher rate and additional rate taxpayers by increasing the basic rate band by 20% and 25% respectively on the gross value of the gift. There is no cap on the amount that can qualify for Gift Aid relief, provided the donor has paid sufficient tax during the tax year to cover the charity’s reclaim from HMRC.
For a donation to qualify for tax relief, the charity must be recognised as a qualifying charity by HMRC and the taxpayer must have made the claim.
Income tax on dividends at the basic rate is significantly lower than alternative income sources and the higher rate on dividends. It is therefore worth considering whether there are sufficient distributable profits within your personal company to allow the declaration of dividends to fully utilise the basic rate band.
In 2022/23, the first £2,000 of dividend income is tax free for all taxpayers. This reduces to £1,000 from 5 April 2023, and to £500 from 5 April 2024.
- Capital Gains Tax Allowance
The Capital Gains Tax annual exempt amount reduces from £12,300 to just £6,000 for gains made in 2023/24. Remember that the 2022/23 allowance is lost if not used by 5 April 2023 and you might want to consider bringing forward disposals of chargeable assets where possible.
- Tax efficient investments
There are three general tax efficient investments that individuals are able to invest in where income relief is available.
These are more complex areas, and generally considered higher risk (from an investment perspective) compared to the previously mentioned tax planning points. However they can offer up to 50% tax relief and offer portfolio diversification.
- Venture Capital Trusts (VCT)
Investments up to an annual maximum of £200,000 qualify for income tax relief at 30%. Dividends are tax-free, and subject to qualifying conditions gains are exempt.
- Enterprise Investment Scheme (SEIS)
Investments in qualifying companies up to an annual maximum of £1 million attract income tax relief at 30%.
- Seed Enterprise Investment Schemes (SEIS)
Investments up to £100,000 per tax year in start-up companies that qualify for the SEIS qualify for income tax relief at 50%.
In all cases, tax relief may be clawed back if shares are sold or qualifying conditions otherwise cease to be met.
Conclusion to Year-End Tax Planning
Year-end tax planning is essential to ensure they’re paying the minimum tax possible. By getting organized, using tax breaks, planning for changes, and seeking expert advice, you can develop a tax planning strategy to help you save on your tax bill.
Are you using the right tax efficient tools to create a financial future you want? We can help you make the most of the available tax reliefs and allowances before 5th April
Key changes to note when year-end tax planning:
- The annual Capital Gains Tax exemption will be reduced from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024
- The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023, and to £500 from April 2024.
If you have any questions regarding year end tax planning and would like to dicuss further then please get in touch