Be More Tax Aware
It’s not exactly a huge secret…but the end of the 2022/23 tax year is fast approaching. What can you do to ensure you are making best use of the allowances afforded to you by HMRC in the UK?
According to Gov.uk, HMRC collected £715.5 billion in taxes in 2021 to 2022, an increase of 22.5% from the year before. There’s no denying that’s a huge sum of money. Whilst taxes must be paid, there are ways in which you can become more tax efficient with your own personal finances and reduce any unnecessary tax bills by utilising the allowances HMRC provides individuals and companies.
Since the Chancellor of the Exchequer, Jeremy Hunt, released his Autumn Statement in November last year, there are a wave of changes set to occur in the coming years where personal allowances are concerned. The earlier you become familiar with the changes, the sooner you can start planning and develop a tax efficient strategy for your finances.
The following information is a brief outline of the changes to expect and some things you may want to think about this tax year to ensure you are optimising your finances better in the future. For the benefit of doubt, the below does not constitute financial advice, for a better understanding of the action you can/should take with your finances, please seek the help of a regulated financial adviser.
- The current ISA allowance is £20,000 per annum. ISAs are both free of income tax and capital gains tax (CGT). This is a valuable product for protection from unnecessary tax charges.
- To maximise ISA allowances between you and your spouse/partner, check they have used their allowance too. Between you both, you could have as much as £40,000 invested tax efficiently before the 5th April 2023, when next years’ allowance then becomes available on the 6th April 2023.
- Do your children or grandchildren have Child Trust Funds (CFTs) or Junior ISAs (JISAs)? You can place up to £9,000 per child or grandchild into an existing CTF or JISA. This is a tax efficient way to pass wealth/money on to the next generation.
- Is your child aged 16 or 17? If so, they can use the full £9,000 JISA allowance and a £20,000 cash ISA allowance.
- You can make contributions up to £40,000 per annum, tapering down to £4,000 per annum for higher earners in your pension. With mutters of potential future cuts to pension tax relief becoming more frequent, this could be a good time to start making use of your pensions annual allowance.
- Unused pension allowances from the last three tax years can be carried over. This means you may be able to make larger contributions this year, if you haven’t used the allowance in the previous three years.
- Should your partner have no earnings, a net premium of £2,880 per annum can be paid into a pension and the pension scheme can reclaim the basic rate tax from HMRC – with the rebate, this means £3,600 is invested. Pensions aren’t just for adults either, maybe now is the time to consider opening a pension for your children or grandchildren?
- By contributing to your pension, you could reduce your income tax rate too. If your total income is between £100,000 and £125,140 you could avoid a marginal tax rate of 60% by making personal pension contributions, and/or donations to charities.
- If you are a Higher or Additional rate tax payer, claim back tax relief on your contributions – personal contributions only receive a basic rate of tax relief at source. You can also claim back previous years too.
- Are you self-employed through a limited company? If so, you can potentially reduce your Corporation Tax, Income Tax (including on dividends) and National Insurance Contributions (NICs) by adding funds into a pension.
- If you are a company director or a shareholder, company pension contributions might be more tax efficient for you than personal contributions, plus it is a tax-efficient way of moving company assets into your own name.
Other tax allowances/strategies to be aware of
- The Capital Gains Tax allowance is being reduced from the 2023/24 tax year and again in the 2024/25 tax year. This means between now and the end of 2022/23 tax year it is vital to review and use your ISA allowances. This years CGT allowance is £12,300. In 2023/24 the allowance is reducing to £6,000 and in 2024/25 it’ll reduce further to £3,000.
- Everyone has a personal allowance of £12,570. If you have your own business, make sure you are drawing this as income, tax-free, and making national insurance contributions to maintain your eligibility for the State Pension.
- If your spouse is not using all of their personal allowance you may be able to claim the Marriage Allowance. This lets them transfer £1,260 of their Personal Allowance to you, reducing your tax by up to £252 every tax year. To benefit as a couple, your partner will need to earn less than £12,570 and your income must be between £12,571 and £50,270 (£43,662 in Scotland).
- If your spouse/partner pays tax at a lower rate, consider transferring any income yielding-assets to them.
- If you are a business owner, make sure to take advantage of dividend income rather than just salary. The first £2,000 of dividend income is completely tax-free. This allowance is being reduced in the 2023/24 tax year to£1,000 and it the 2024/25 tax year to £500. You may also be able to minimise your NICs too.
- Make use of your annual Inheritance Tax gift exemptions of £3,000 per annum. These are Inheritance Tax free and reduce the size of your estate for IHT purposes. You can make gifts to loved ones, but another way to pass wealth to the next generation in a tax efficient way is through surplus income. Speak to a financial adviser on the latter for more information.