Personal Tax Planning for the end of the 2023 Tax Year

As we come to the close of one tax year, and the start of another, now is the best time to consider whether you are taking advantage of all your available individual allowances, reliefs, and exemptions. Before they renew on 6 April 2023, read our simple guide below to ensure that no allowance goes to waste, making sure you pay as little tax as possible!

Pension Annual Allowance

Pensions are generally very tax-efficient. Each tax year, an individual can claim tax relief on contributions to their personal pension pots, however there are limits to the contributions that can be made. The standard annual maximum pension allowance for each tax year is £40,000 (although this is capped at an individual’s ‘earned income’) and extra tax relief can be claimed by higher and additional rate taxpayers. For those with higher levels of income, the annual allowance could be reduced.

Any un-used annual pension allowance from the three previous tax years can be carried forward to give potential accumulated maximum allowances of £160,000 for the 2022/23 tax year. However, you must be a member of a pension scheme in all of the three previous tax years for this to apply. If you do have unused allowances carried forward from 2019/20 you will lose them at 5 April 2023 if you do not use them.

Personal Allowance

Most UK resident individuals with income less than £100k per year are entitled to a standard personal allowance of £12,570 for 2022/23 to set against income received each tax year. If you or your spouse has income below this level, you may wish to consider if you can move some income producing assets between yourselves, to ensure you are both using your full allowances. Any income in excess of your allowance is chargeable to income tax rates of 20%, 40% and 45% depending on your levels of income. For taxpayers with income exceeding £100,000, your personal allowance reduces.

Boosting your State Pension

Currently, you are required to have attained 35 qualifying years of state pension credits in order to receive your full UK state pension and 10 qualifying years in order to receive any state pension at all. Those individuals below 35 years who would like to top-up, can do so through voluntary National Insurance payments but usually only for the previous 6 tax years. Therefore, 5 April 2023 is the cut off for topping up your credits for the 2016/17 tax year.

ISA Allowances 

ISAs are a tax-efficient saving option due to their exemption from Income Tax and Capital Gains Tax, however there is a limit to the amount that can be contributed to ISA accounts each tax year. The current allowance for adult and junior ISA’s stands at £20,000 and £9,000 respectively, with any un-used allowance unable to be rolled over to the next tax year. This limit applies to the sum of contributions to all types of ISA’s– cash or shares – in one tax year. Therefore, if you have not yet used your allowance this year, it will be lost if not used by 5 April.

Capital Gains Tax Allowance

Individuals who make gains on investments of up to £12,300 during 2022/23 pay no Capital Gains Tax (CGT) due to the CGT annual exemption each tax year. Any gains over this allowance are chargeable at 18% or 28% for residential property, and 10% or 20% for all other gains, depending on your levels of other income in that tax year. Your annual exemption cannot be rolled over to a future tax year, so it will be lost if not used by 5 April 2023.

For the 2023/24 tax year, the individual annual CGT allowance will reduce to £6,000. This will fall further to £3,000 for 2024/25, and so it could be worth crystallising any larger gains now in order to make use of the larger exemption.

IHT Annual Exemption

Gifts made to friends or family can usually be covered by your annual gift allowance of £3,000. These gifts fall out of your estate for inheritance tax purposes immediately. Any unused allowance from the previous tax year can be carried forward for one tax year giving a potential maximum gift allowance of £6,000 in a tax year. Therefore, if you did not use your exemption for 2021/22, you could make gifts totalling £6,000 this tax year in order to utilise your full allowance.

Dividend Allowance

Each individual is entitled to a £2,000 dividend allowance to cover dividend income received each tax year. For the 2023/24 tax year, the individual dividend allowance will reduce to £1,000. This will fall further to £500 for 2024/25.

Any dividend income in excess of £2,000 is chargeable to 7.5%, 32.5% or 38.1% depending on your level of other income. From 6 April 2022, dividend rates will increase by 1.25% giving new rates of 8.25%, 33.75% or 39.35% for dividend income in excess of £2,000. If you are an owner-managed business with profits, and you have not yet utilised your £2,000 dividend allowance, we would strongly advise you to consider taking a dividend of £2,000 this year.

Overpayment Relief

Individuals can make claim to HMRC if they believe they have paid too much tax in the previous four tax years. Therefore, if you believe you have overpaid income tax, capital gains tax or corporation tax in tax year 2018/19, you have until 5 April 2023 to submit a claim for repayment to HMRC.

Tax-Efficient Investments

Tax relief is given for certain qualifying investments in growing companies. Investments falling within the Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and the Seed Enterprise Investment Scheme (SEIS) could be considered. The EIS and VCT schemes allow investors to receive 30% upfront income tax relief whereby SEIS investors receive 50% income tax relief on the amount which has been invested. Income tax reliefs are generous as these types of investments are generally considered high-risk.

If you would like further information about this article or would like personalised advice on how to structure your financial affairs for personal tax efficiency, please do get in touch.

Alice Follett ATT CTA

Tax Senior

01276 61203