The end of the tax year is near: Tax planning points to consider

Another year has passed and the end of the 2022/23 tax year is fast approaching. With a new tax year imminent and some new allowances coming into play, here are ten year-end tax planning opportunities to consider before 5 April 2023 rolls around.

1. Pension contributions

Making a personal pension contribution before the end of the tax year can have multiple benefits. You can utilise your annual pension savings allowances which can only be brought forward for three tax years; tax relief could be available by way of increase tax bands; and you’re saving for your future.

Please be aware that pension contributions are a complex matter with many variables affecting the amount individuals can contribute. If limits are exceeded, you may incur a tax charge. Therefore, please seek advice from your tax and financial advisors before making any contributions.

2. Charitable donations

As with pension contributions, if you give cash contributions to charity using Gift Aid, you can get tax relief through rate band extensions.

The timing of cash donations is less of a factor as donations can be carried back to the previous tax year, provided the previous return has yet to be submitted to HMRC.

There are different rules that apply to the gift of quoted shares to charity; the relief is given by a reduction to your taxable income in the year of the transfer, based on the market value of the shares.

3. Personal allowance tapering

For most people, the personal allowance is £12,570 and will stay at this level until the end of the 2027/28 tax year. However, where taxable income exceeds £100,000, the allowance begins to reduce by £1 for every £2. This imposes an effective 60% rate of tax.

When income reaches £125,140, the personal allowance is lost altogether. For the 2023/24 tax year, this is also the point at which the 45% tax rate comes into effect (compared with £150,000 for 2022/23).

To reduce taxable income, consider making personal pension or charitable donations.

4. Capital gains tax (CGT) allowances

At present, the tax-free capital gains allowance is £12,300 per individual. However, from 6 April 2023, this is reducing to £6,000 and will reduce to £3,000 from 6 April 2024.

Therefore, it may be worthwhile considering any assets which are held at a gain and whether you wish to make disposals to utilise the annual exempt amount.

5. Dividends from your personal company

For the 2022/23 tax year, all individuals have a £2,000 dividend allowance, which allows dividend income up to this limit to be received tax free. However, from 6 April 2023, this limit will be reduced to £1,000 (falling again to £500 from 5 April 2024).

Consider the timing of dividends voted by your personal company to use the available allowance by shareholders.

6. Capital allowances

Sole traders or partnerships should consider investing in any necessary plant or machinery before the end of the tax year. This could attract 100% capital allowances which will reduce taxable profits and lower the overall tax bill.

7. Tax efficient investments

Investments such as Venture Capital Trusts (VCT), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) are investments in small, unquoted trading companies. There are beneficial tax reliefs for these investments, including income tax relief (up to 30%) in the year of investment or the prior year.

It’s also worth noting that any dividends received for VCTs are exempt from tax, and EIS/SEIS investments can benefit from capital gains tax deferral relief.

Given the nature of these investments, there are significant risks to capital, so please get advice from a financial advisor before making such investments.

8. Marriage allowance

Where one spouse’s income is below the personal allowance and the other spouse is a basic rate taxpayer, you can transfer 10% of the lower earner’s personal allowance to the higher earner. This will reduce combined income tax payable by up to £252 per tax year.

You can also backdate this claim.

9. Inheritance tax (IHT) exempt gifts

Each tax year, an individual can gift £3,000 free from IHT. If no gift was made in the previous year, this allowance can be doubled.

10. ISA subscriptions

Each year, an individual can invest £20,000 into an ISA. ISA’s are tax efficient investments either held as cash or stocks and shares. The income and gains arising from the funds are exempt from income tax and capital gains tax.

Financial advice should be sought before making such an investment. 

If you’d like to discuss these ten points in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Jordan Smith