With high inflation in 2022 and a recession looming for 2023, now is the time to think of smart solutions to make your cash go further with tax planning.
Here’s what you should be thinking about as we approach the end of the 2022/23 financial year.
Tax allowances
In the UK, most taxes are only charged on sources of income at a certain value – these are known as tax-free allowances.
You’ll probably be aware of the basic tax-free personal allowance for income tax which means you only pay tax on regular income above £12,570. Other taxes have them, from capital gains tax to inheritance tax.
However, these allowances don’t roll over into the next tax year, so once they’re gone, they’re gone.
So, if you’re planning on selling an asset or piece of property in 2023 and know you’ll be liable for capital gains tax, why not bring the disposal forward to before April and maximise the benefit of your tax-free allowance?
You would especially benefit from this when you bear in mind the tax-free allowances for capital gains tax and dividend tax will half in value next tax year, which will make effective tax planning more difficult.
Marriage allowance
Married couples and civil partners are entitled to use a unique tax scheme to reduce their tax burden by allowing them to transfer £1,260 of their personal allowance to their spouse or partner.
According to the Government, this reduces the tax of the recipient by up to £252 in the tax year – use their calculator to see how much you could save.
To benefit as a couple, you (as the lower earner) must normally have an income below your personal allowance (£12,570).
Pension tax relief
To encourage people to save money for retirement, the Government pays tax relief on pension contributions, which automatically adds more money to each contribution you make.
You receive tax relief at the highest rate of income tax you pay. So, if you’re a basic rate payer, you’ll get 20% tax relief – in practice, every £1 you pay into your pension pot automatically becomes £1.25, because £1.25 taxed at 20% is £1.
Higher and additional rate taxpayers will of course get a better deal, but the tax relief isn’t applied automatically for them, so make sure you’re claiming your extra tax relief via your annual tax return.
However, you should make sure not to go over your annual allowance, which is either £40,000 or 100% of your relevant UK earnings (whichever is lower). If you do, you’ll not only miss out on tax relief on the excess, but will be subject to a tax charge.
Company directors should be especially cautious, as dividends don’t count as relevant UK earnings, so if you’ve taken a small salary to be topped up by dividends, you’re probably going to have a small annual allowance.
ISA top ups
ISAs offer great protection against income tax and capital gains tax, but only on the amount that is within your ISA allowance, which is currently £20,000.
You pay no income tax on the interest or dividends you receive from your ISA, while any profits from investments are free of capital gains tax.
However, the £20,000 is on a ‘use it or lose it’ basis; if you have some money left to put in, it won’t roll over into the next financial year, so use it while you still can!
We’re tax planning experts, eager to help you get the most out of your tax strategy. Get in touch with us to discuss your tax plan.