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Ahead of one of the “most decisive” tax-year ends in decades, taxpayers are being urged to review their earnings, savings and investments to make sure they’re well-prepared for the new tax year on April 5. As per Chancellor Jeremy Hunt’s Autumn Statement, a number of new major, rule changes will come into effect that could leave many paying out a ‘significant’ amount more.
As taxpayers await the next major fiscal announcement from the Government – the Chancellor’s Spring Budget on March 15 – many will still be digesting the impact of measures announced in the Autumn Statement.
Such measures, as tax expert Anthony Whatling describes, will take on “added urgency” as the new tax year approaches.
A number of crucial allowances are being cut from April 2023 and most rate bands are due to be frozen, issuing what many analysts have described as a “stealth tax raid” that could cost Britons hundreds extra per year.
Mr Whatling, who is a tax partner at wealth manager Evelyn Partners, explained: “It’s one of the most decisive tax-year ends in decades. So if not done already then it’s definitely time for earners, savers and investors to review their tax position. Many allowances are calculated on a yearly basis, so a pre-year-end review can help to identify any potential tax savings, particularly with the changes afoot.”
Amongst tax band freezes, such as National Insurance, inheritance tax and personal allowances, and tax increases, such as that imposed on higher rate income tax, there are several ways households can better protect their finances and retain more of their earnings ahead of the new tax year.
According to Mr Whatling, one key area to begin is to look into reducing taxable income to avoid the 60 percent tax trap.
The highest rate of tax is 45 percent, applying to individuals with a total income over £150,000. However, personal allowances are tapered for individuals with income between £100,000 and £125,140 (2022/23), giving an effective tax rate in this band of 60 percent.
To help reduce taxable income, which can be particularly tax efficient for those who fall into this 60 percent effective rate band, Mr Whatling said: “You can make pension contributions or charitable gift aid payments; transfer income-generating assets between spouses or civil partners; use tax-free investments and/or tax efficient investments; invest in assets which generate capital growth rather than income; and alter the timing of the income to maximise the use of lower rate bands.”
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From April 2023, the additional rate threshold will be reduced to £125,140, meaning that anything over the effective 60 percent rate band will be taxed at 45 percent.
Mr Whatling said: “This provides an additional incentive for some taxpayers to move income to the current tax year, although it will also accelerate the resulting tax payment. In Scotland, where income tax will rise one percent in the higher and additional rate bands in 2023/24, this becomes more significant.”
Pension contributions – use the annual allowance
Pension contributions are still a really tax-efficient way of saving for retirement, with tax relief given at a person’s highest marginal rate of income tax.
Mr Whatling said: “This benefit is accentuated in payroll systems that also afford relief against National Insurance contributions, for instance, salary sacrifice. Employees might find their employer is receptive to introducing such a scheme.”
He continued: “Tax relief is restricted to the lower of your annual allowance (typically £40,000) and what is known as your net relevant earnings. You may also be able to take advantage of any unused annual allowance from the previous three tax years to make additional pension contributions under the “carry forward” rules.
“This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so advice can often be useful.”
However, he noted: “There is a risk of future changes to this reasonably generous relief, meaning it is worthwhile considering taking full advantage of the current allowances now.”
Tax on savings income – share with a spouse
According to Mr Whatling, some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and £2,000 for dividend income in 2022/23.
Savings and dividend income falling within these bands is taxed at zero percent. Separate from the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers.
The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers.
Mr Whatling said that spouses and civil partners should review who holds any savings that generate taxable income to ensure these allowances and rate bands are utilised efficiently.
He added: “You should be aware though that the dividend allowance will halve from April 2023 to £1,000 and then halve again to £500 from April 2024.”
Make tax-free or tax-efficient investments
There are various tax-free and tax-efficient investments available, too and consulting with an expert can help decipher if any of these investments are suitable.
Mr Whatling said: “You can consider making tax-free investments through ISAs or National Savings. The annual ISA subscription limit for 2022/23 is £20,000, and this limit cannot be carried forward if not used.
“You can also consider Junior ISAs for children under 18 (£9,000 is the limit for 2022/23). Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As ISA income is not taxable, this allows you to give cash to your children without having to pay tax on the income generated.”
As well as cash ISAs, Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments may also provide tax relief and the opportunity to defer capital gains.
However, Mr Whatling noted: “These investments are considered high risk, and there is a risk of further changes to the schemes, potentially even at the March 15 Budget.”
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Capital gains tax
As capital gains tax is charged when an asset is sold, people have some control over when to pay it.
Mr Whatling explained: “If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is £12,300 in 2021/22.”
He also said that crystallising unrealised losses to offset gains may also be an option.
To do this, Mr Whatling said: “You can consider selling an asset which stands at a loss or making a ‘negligible value’ claim on assets that currently have no value. Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses.”
The capital gains tax annual exempt amount will more than halve to £6,000 from April 2023 and will then halve again to £3,000 from April 2024.
Mr Whatling said: “This may provide an incentive to accelerate gains if you have unused allowance in the current tax year, as planning around the annual exempt amount will become more difficult.”
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