Year-end tax planning strategies - what you should do next
QUESTION: I have just filed my 2022 tax return and am wondering with about eight weeks to go to the tax year end, what planning can I do to reduce this year's liability?
ANSWER: The UK Income Tax Year ends on April , and you still have time to mitigate your 2023 tax liability via tax planning to ensure all available reliefs are utilised.
Currently, every UK taxpayer has a basic rate band of £37,700 with income within this band generally taxable at 20 per cent. Individuals are also entitled to a tax-free personal allowance of £12,570 which means that you can earn up to £50,270 before the higher rates of tax will apply.
The higher rate of tax, usually 40 per cent, applies to income over £50,270 with the additional rate band, usually 45 per cent, applying to all income over £150,000. We now know that this additional rate band will reduce to £125,140 from April 6, so if you are due a bonus in 2023 which takes your income up to £150,000, it would be tax advantageous to receive it before that date if that is possible.
When an individual's income exceeds £100,000, their personal allowance is reduced by £1 for every £2 over £100,000. This phased reduction of the personal allowance means that income between £100,000 and £125,140 is effectively taxed at a rate of 60 per cent. If you can opt for a pension contribution instead of a bonus to restrict earnings below £100,000 this would save you a lot of tax.
Generally, an individual is entitled to make £40,000 pension contributions each year. Any unused pension allowance from the previous three years can increase this amount. However, the pension allowance is restricted if an individual's relevant net earnings, not including dividends, is lower than £40,000 or if an individual's total earnings, including dividends, exceed £240,000. Please note that a Pension Savings Charge may arise if an individual pays too much into their pension during a tax year.
Pension contributions can extend an individual's basic rate and higher rate band in the tax year when made. In addition, they can extend the £100,000 threshold before an individual's personal allowance begins to be reduced. It is important to speak with your Accountant or Financial Advisor before making a pension contribution to ensure that you receive the relief that you are expecting.
Individuals are currently entitled to a tax-free dividend allowance of £2,000. Shareholders, particularly in family companies, should consider maximising this relief before the end of the tax year as this cannot be carried forward if not utilised.
Every individual is also entitled to a Capital Gains Tax (CGT) annual exemption of £12,300, which is unable to be carried forward. Married couples should consider moving assets into joint name prior to sale, as this is tax-neutral for CGT purposes, and means that two annual exemptions can be relieved against the gain.
For 2022/23, the maximum that you can invest in an Individual Savings Account (ISA) is £20,000. ISA's can be very tax efficient as income which arises on ISA investments is exempt from income tax and any capital gains are exempt from CGT. Unlike pensions there is no tax relief for investing into an ISA however there are no tax charges on ISA withdrawals.
For those investors prepared to take more risk in search of higher returns, there are several tax efficient investment products, in the form of the Enterprise Investment Scheme, Seed Enterprises Investment Scheme and Venture Capitals Trusts scheme. Investment into these provides upfront income tax relief ranging from 30 per cent to 50 per cent and after a qualifying period of 3 years, any gains made by the investment are tax free on encashment.
:: Party Harty (firstname.lastname@example.org) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies