PRE YEAR END TAX PLANNING FOR INDIVIDUALS

What You Should be Doing Ahead of the New Tax Year

With the self-assessment deadline just passed, now represents a perfect time to review your tax position ahead of the tax year ending on 5 April 2024.

Most tax reliefs and exemptions do not apply retrospectively, so it is important that action is taken before 5 April 2024 to ensure any benefit received is in this tax year.

With this being an election year, a change of government would lead to a change in the tax landscape. It is therefore even more important this year that your affairs are arranged in the most efficient way to take advantage of all of the allowances and exemptions available to you.

Some of the key areas to review ahead of the end of the tax year are as follows:

Pension Contributions

Individuals can contribute up to 100% of their earned income into a pension scheme receiving tax relief at their marginal rate of tax.

Pension contributions are subject to a maximum limit of £60k (was previously £40k) however you can utilise previous three years unused limits.

Pension contributions remain a great way to remain tax efficient and attract relief at your marginal rate of tax.

Additional savings on national insurance can also be made if pension contributions are made via salary sacrifice arrangements through your employer.

Gift Aid Donations

You are able to make donations to UK registered charities tax-efficiently and tax relief is obtained at your marginal rate of tax.

For basic-rate taxpayers, this means relief at 20%. If you donate £10 to a charity and elect to receive gift-aid, the charity will receive £12.50 (the additional £2.50 being tax paid to the charity from the government from your donation).

For higher-rate and additional taxpayers, it also increases your tax-thresholds so that you pay 40% (or 45%) tax on less of your income.

It also reduces your income for child benefit, marriage allowance, tax-free childcare and 30-hours free childcare purposes too. Gift aid a simple way to support charities close to your heart whilst remaining tax-efficient.

ISA Contributions

ISAs remain an excellent method to shelter income and gains from tax.

Individuals can contribute up to £20k per year into an ISA. ISA’s are completely free from tax, meaning that any gains or income generated by an ISA do not need to be reported on a tax return nor any tax paid.

If you have spare cash, opening a cash ISA is a simple way to avoid paying tax on any interest receipts. Similarly, investments should be made through a Stocks and Shares ISA to avoid paying tax on dividends, interest and gains.

A lifetime ISA is a special type of ISA that you can open until you are 40 years old and can pay into until you are 50 years old. In this ISA, you can contribute £4,000 per year and the government will contribute a further £1,000. It is usually used for retirement or to purchase a first-house as there are sometimes penalties on withdrawing funds.

For all other ISAs, withdrawals can be made without restriction.

Junior ISAs can also be created for children under 18 living in the UK, and a separate limit of £9,000 per year can be contributed into the ISA.

Any ISA allowances not utilised are lost at the end of the tax year, so are a “use it or lose it” allowance so we recommend taking advantage of this where possible.

Crystalising Capital Gains

Each individual has a tax-free annual exempt amount of £6,000 for the 2023/24 tax year. This means the first £6,000 of gain will not attract any capital gains tax.

If you hold investments, and have not made any gains in the tax year, it may be beneficial to crystalise up to £6,000 of capital gains ahead of the end of the tax year as it will be a tax-free disposal.

There are anti-avoidance rules which prevent disposing of an investment to crystalise a gain, and then immediately repurchasing the same investment so advise should be sought.

The annual exempt amount is reducing to £3,000 in the 2024/25 tax year so this exemption will become less valuable moving forwards.

Consideration when crystalising capital gains is how much other income you have during the tax year. Most gains are taxed at 10% at the basic rate and 20% at the higher rate (18% and 28% for residential property).

If your other income usually makes you a higher rate taxpayer this means you will pay 20% or 28% capital gains tax on any disposals. If, in the 2023/24 tax year your income is lower, you can crystalise capital gains to pay tax at either 10% or 18% up to your basic rate band, a saving of 10%.

With it being election year, and rumours of capital gains tax rates increasing to income tax rates, this becomes even more important as you may be able to pay capital gains tax at 20% this year, which may end up increasing to 40% next year (and beyond).

Whilst crystalising capital gains is attractive from a tax point of view, we are unable to offer investment advice so you should speak to your financial advisor prior to making any disposals.

Spousal Transfers

To maximise the tax-efficiency from crystalising capital gains, you can also utilise your spouse’s exemption.

Transfers of assets between spouses are tax-neutral from a Capital Gains Tax perspective, and the receiving spouse will receive the asset at the cost of the donor spouse.

Therefore, shares (for example) can be transferred from one spouse to another, and then sold to take advantage of tax-free annual exemptions and to also take advantage of a lower rate of tax.

Tax Efficient Investments

There are various tax-efficient investment schemes available to investors. These are the Enterprise Investment Scheme (EIS), Seed-Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT).

The EIS scheme works by giving a tax-reducer of 30% on any investment made and the maximum investment which can be made in a tax-year is £1m. This means you can obtain £300,000 of income tax relief.

The SEIS scheme works similarly but is designed for investment into smaller companies. Relief is given at 50% and the maximum investment is £100,000, giving income tax relief of up to £50,000.

The VCT scheme works similarly, giving 30% tax relief on up to £200,000, giving £60,000 of income tax relief. VCT schemes invest in different companies, so the risk is spread and VCT’s also benefit from tax-free dividends.

Reinvestment relief is also available, if you have made capital gains previously, it may be possible to exempt or defer those gains if you invest the proceeds into one of the above share schemes.

In addition, if shares are kept for three years (five for VCT’s), any capital gain made on the disposal of shares is exempt from tax, or any loss on the shares can be offset against income.

Relief is clawed back if the shares are disposed of within three years.

Marriage Allowance

If you or your spouse earns less than the personal allowance (£12,570), it may be beneficial to claim the marriage allowance.

This election transfers £1,260 of the personal allowance from one spouse to another. If the lower-earning spouse has income below £12,570, the transfer of personal allowance would mean in most cases no additional tax is due but the higher-earning spouse benefits from an additional £1,260 of tax-free income.

This can only be claimed if the higher-earning spouse pays tax at the basic rate, in most cases this means income below £50,270.

The effect of such a transfer will reduce the higher-earning spouses tax liability by £252.

Claims for Expenditure

If you incur costs that are not reimbursed by your employer, it is possible to claim a tax reduction on these costs.

The most common ones are claiming for use of home as office, if you are a home worker for example, which means you can claim a use of home allowance of £312, the tax benefit of this is based on your marginal rate of tax. For a higher rate taxpayer, this is a tax saving of £124.80.

You can also claim tax relief on mileage, if your employer requires you to travel for work and doesn’t reimburse mileage at HMRC approved rates. HMRC approved rates are 45p for the first 10,000 miles and 25p for in excess of 10,000 miles per year.

In some cases, employers will reimburse less than this, and you are able to claim tax relief on the difference.

Your Income Level  – Tax Traps

Our tax system has a lot of hidden complexities which may mean you pay a much higher effective rate of tax than the headline rates.

The first £12,570 of income is tax free, the next £37,700 of income is taxed at 20%, the next £74,870 of income is taxed at 40% and anything in excess of this is taxed at 45%.

However, there are various “tax traps” which can mean you pay a much higher rate.

For example, when your income exceeds £100,000, your personal allowance gets reduced by £1 for every £2 your income exceeds £100,000. This means income that would previously be covered by your personal allowance is instead taxed at 40%. Due to how this works, income between £100,000 and £125,140 is effectively taxed at 60% and not the headline rate of 40%.

In addition, once your income exceeds £100,000, you are no longer eligible for tax-free childcare (worth £2,000 per year) nor 30-hours free childcare (it’s worth varies, but could be worth up to £5,000 to £7,000 per year).

Therefore, if you were previously earning £100,000, but have had a pay rise and are now earning £105,000, you may be significantly worse off and as such would benefit from some tax planning (such as making pension contributions).

There is another tax-trap when your income exceeds £50,000 if you or your partner are in receipt of child benefit. When your income exceeds £50,000, child benefit is repaid at a rate of every £1 per £100 of income.

If you have three children and receive child benefit of £2,902 per year, due to how the clawback works, any income earned between £50,000 and £60,000 is taxed at an effective rate of 69%. In this position, you may find it more beneficial to contribute to a pension to reduce your income to below £50,000 as any contributions will receive relief at 69%.

Spouse’s Income Level

Assets can be transferred between spouses on a tax-neutral basis.

If assets are generating income and one spouse is paying tax at 40%, whereas the other spouse still has their personal allowance available, it is likely to be beneficial to transfer assets into the lower-earning spouses name.

In addition to the personal allowance, individuals get a dividend tax-free amount of £1,000 (£500 for 2024/25) and a tax-free amount for interest, which is usually £1,000 or £500, but could be up to as high as £5,000 depending on income levels.

Property is slightly more complicated as although there is no Capital Gains Tax, there may be Stamp Duty Land Tax, particularly if a mortgage is in place.

National Insurance Contributions

When you make National Insurance contributions, you receive a credit towards your state pension. The amount of credits you need varies depending on when you started contributing, but is generally 35 full years for the maximum state pension.

There is a useful government tool which shows how many qualifying national insurance years you have: https://www.gov.uk/check-national-insurance-record.

If you find you do not have 35-qualifying years, and are not likely to have 35-qualifying years by the time you retire, you can purchase missing qualifying national insurance years.

You can usually purchase any missing years in the last six years, but until 5 April 2025, you are able to purchase missing years going back to 2006.

You should therefore review your National Insurance position to determine if you would benefit from purchasing missing National Insurance years.

How We Can Help

We offer a comprehensive pre-year end tax planning review where we can review the above for you and suggest any appropriate mitigation strategies.

If you feel you would benefit from the above, please contact Jordan Kelly [email protected].