With the end of the personal tax year on 5 April 2023 swiftly approaching, there is still time to use unused tax reliefs to optimise the tax position. We have seen several changes to tax bands and allowances during this year and performing a review is always advised pre end of tax year.
Clearly adequate funds need to be in place to pay for day-to-day lifestyle and cover the essential outgoings but there are several ways to shield income and savings from tax and allow you to protect more of your wealth.
Top up your pension
Individuals can contribute up to 100% of their income (up to the annual limit of £40k) each year into a pension scheme. Contributions attract tax relief depending on your tax rate and you can look back 3 years to top up contributions up to the annual limits. That’s a potential maximum tax-free contribution of £160,000 for the current and previous 3 years. Please note there may be income restrictions on the annual £40k limit.
You could also ask your employer about exchanging some salary for a larger employer pension contribution. This can be an attractive option to the employer who benefits from NIC savings.
Individuals can contribute up to £20,000 into an ISA each tax year although this allowance can’t be carried forward so really is a ‘use it or lose it’ scenario. Contributions can be split between cash and investment ISAs with the key advantages being there is no income tax or capital gains tax to pay on interest. ISA income is not reportable on the Self-Assessment Tax Return.
You can put up to £4,000 each year into a Lifetime ISA, until you 50. You must be over 18 and under 40 to open a Lifetime ISA. The government will add a 25% bonus to your savings, up to maximum of £1,000 per year.
Junior ISAs are for children who are under 18 and living in the UK. 22/23 the savings limit for Junior ISA’s is £9,000.
Capital Gains Tax
Individuals can make tax-free gains of up to £12,300 in each tax year when selling investments. Please bear in mind the annual exempt amount reduces to £6,000 from 6th April 2023.
There are separate tax rules for selling business assets and gains can be ‘held over’ when investing in tax-efficient schemes such as the Enterprise Investment Scheme.
Capital losses can be offset against capital gains or other gains made in the same tax year. Any remaining loss can be carried forward for offset against future capital gains.
Investors Relief provides a lifetime limit of £10m with a 10% rate of tax on qualifying investments. It can apply to disposals of shares in unquoted trading companies or the holding company of a trading group.
The shares must be ordinary shares and issued and subscribed for at arms length. Unlike business asset disposal relief there is no minimum percentage.
Business Asset Disposal Relief
Business Asset Disposal Relief (BADR) gives a lower rate of capital gains tax on the disposal of all or part of your business. BADR is taxed at 10% up to the lifetime limit of £1m. To qualify, in the two years up to the date you sell your business, you must be a sole trader or if you are selling shares you must be an employee or office holder of a trading company and own more than 5% of the shares.
If you own an estate worth in excess of £325,000, you could consider gifting within the £3,000 annual exemption to save tax. This annual exemption can be carried forward to one year. Other tax-free gifting schemes include:
- Gifting up to £250 to as many people as you want
- Wedding gifts of up to £5,000 to a child, £2,500 to a grandchild and £1,000 to a relative or a friend
- Gifts from surplus income – but you must maintain your usual standard of living
Trading income relief
Sole traders can claim up to £1,000 in tax relief against their trading income each tax year. However, this can’t be claimed if expenses and capital allowances are used against income.
Tax Efficient Investments
Enterprise Investment Scheme (EIS) Investors can claim up to 30% income tax relief on EIS investments. The maximum investment you can claim relief on in a tax year is £1 Million, which amounts to £300,000 of income tax relief, plus capital gains tax exemption on any profits that arise from the sale of shares after three years.
Seed Enterprise Investment Scheme (SEIS) Investors can claim up to 50% income tax relief on SEIS investments. The maximum investment you can claim relief on in a tax year is £100,000, which amounts to £50,000 of income tax relief, plus capital gains tax exemption on any profits that arise from the sale of shares after three years.
Venture Capital Trusts (VCTs) Investors can claim up to 30% income tax relief on the amount invested, provided you keep your VCT shares for at least five years. The maximum investment you can claim relief on in a tax year is £200,000, which amounts to £60,000 of income tax relief. Although most VCT’s are growth investments and any growth is tax free, the majority of returns are normally paid through tax-free dividends.
Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year). To benefit as a couple, the lower earner must normally have an income below the Personal Allowance – this is usually £12,570 and the higher earner pays income tax at the basic rate.
Review of assets held as a couple and allocating to the individual who has lowest rate of tax or not used dividend allowance or savings allowance. For example transferring personal assets between spouses is exempt for capital gains. Gifts between spouses are exempt transfers for IHT. You do not pay Capital Gains Tax on assets you give or sell to your husband, wife or civil partner as these are deemed to be transfers at no gain/no loss.
You may be able to claim tax relief for additional household costs if you have to work at home on a regular basis. If you pay 20% basic rate of tax and claim £6 a week you would get £1.20 per week in tax relief.
If you pay tax above the basic rate, you can claim the difference between the tax rate you pay and basic rate tax on your donation. If you donate £100 to charity they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%). In addition for gift aid you can choose to offset against the current tax year or a prior year. Please bear in mind the claim has to be made on the original self assessment return and must be at least equal to income tax paid. In addition, carry back claims from both current and previous year together cannot be more than four times what you paid in tax in the previous tax year.
If you other income is less than £17,570 your starting rate for savings is a maximum of £5,000, every £1 of other income above personal allowance reduces the starting rate for savings by £1.
For higher incomes, depending on your income tax band you may get up to £1,000 tax free savings allowance.
The dividend allowance for 22/23 is £2,000 and is available to everyone with no restrictions on income levels. Please note this amount reduces to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.
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