The 2022/23 tax year will end on April 5th therefore, it is really important to consider your tax planning and making the most of available allowances, reliefs and exemptions. If you do not take the opportunity to do this some valuable tax savings may be lost.
To keep things simple, we have created a simple guide explaining what options are available:
Maximise your Individual Savings Account (ISA)
The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple could put away £40,000 before the 5th April 2023. This can be paid into either a Cash ISA, a Stocks and Shares ISA or a combination of the two.
The brilliant thing about ISAs is that they are free of Capital Gains and Income Tax. Therefore, your full ISA allowance should be used as a priority each year if you can, as it’s one of the most tax-efficient ways to save.
Unfortunately, if you do not make use of your ISA allowances, they cannot be carried forward to the new tax year.
Save for your children
Passing money onto the next generation such as children or grandchildren is often a consideration for many. A Junior Individual Savings Account (JISA) is a great way to save for their future and can be used to assist with university fees or a house deposit for example. With a limit of £9,000 per year 2022/23 there is scope to build a good pot over time whilst still having the same tax benefits as an adult ISA.
A JISA allows you to control the account on behalf of your child until they reach age 16. However, you can pay money into their account until they reach age 18 and until they reach 18, no withdrawals will be permitted. If you do fully use their £9,000 allowance each tax year this cannot be carried forward to the following year and the benefit will be lost. There are various JISA providers available and some will let multiple people contribute to the account which is a good feature.
Top up your pension
There are limits to the amount you can tax-efficiently pay into your pension. Known as the Annual Allowance, it’s currently set at the equivalent of your relevant taxable income that year, up to a maximum of £40,000. For example, if your relevant taxable income for the 2022/23 tax year was £38,000, that would be the maximum you could pay into your pension.
However, for high earners, the Annual Allowance may be as low as £4,000.
Personal pension contributions are paid net of basic rate Income Tax and your pension provider collects the tax relief from HMRC. Basic-rate tax relief is currently 20%. So, if you contribute £80 a month, £100 will be invested automatically in your plan – that’s an additional £20 at no extra cost to you.
If you are a higher-rate or additional-rate taxpayer, you can claim the extra relief from HMRC on your yearly tax return or by asking your tax office to adjust your tax code. The value of any tax relief depends on your individual circumstances. It is essentially free money, so do not miss out.
Making Pension contributions as a company director of a Ltd Company
Being your own boss has many benefits such as being able to manage your own time and the clients that you work with however, being self employed means you lose many of the benefits you would have within a corporate role like employer pension contributions and sick pay for example.
Because of this it is really important to plan ahead for your retirement and start saving into a pension as early as you can. With people in the UK living longer than ever before there will be more of a reliance of the state pension which is currently £185.15 per week which is increasing to £203.85 per week from 2023/2024 tax year. It is important to make your own provision to allow you to enjoy the retirement you wish.
Being a company director you would potentially have the flexibility to contribute to your pension as an employee or as a director and still claim tax relief. Depending on whether you are a basic or higher rate taxpayer will dictate the tax relief you will receive.
Should you wish to contribute to your pension via your Ltd Company, unlike personal pension contributions there’s no limit on what the company is allowed to pay into your pension and obtain tax relief, providing it meets HMRC’s ‘wholly and exclusively’ test. By making contributions from your Ltd Company, you would also benefit from not paying national insurance which is another good thing.
‘Carry Forward’ to maximise pension contributions
Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme. This may be particularly useful if you are self-employed and your earnings change significantly each year, or if you are looking to make large pension contributions.
To use Carry Forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2022/2023), and you can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago. You cannot receive tax relief on contributions in excess of your earnings in a tax year, and you only receive higher-rate tax relief to the extent that you have paid it.
Think of your spouse
If your spouse is a lower or non-taxpayer, it is possible for them to transfer 20% of their unused personal allowance to their partner which could save up to £250 in tax.
Also, if you have income-producing assets (for example, buy-to-let property or even saving accounts), you could put these in the lower or non-taxpaying spouse’s name to lower your overall Income Tax liability. Assets can be passed between spouses without any CGT liabilities.
Utilise your Capital Gains Tax allowance
Individuals have an annual CGT allowance that currently enables them to make gains on investments of up to £12,300 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% with disposals of residential property being taxed at 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Married couples may be able to use each other’s allowances by transferring assets before they are sold.
Please be aware the CGT allowance is changing significantly from the 2023/2024 tax year to £6,000 and from 2024/2025 tax year it will be £3,000. So it is really important to try and take advantage of the higher allowances before April 5th.
Making gifts throughout your lifetime is a really effective tax planning exercise to reduce the value of your estate or remove an inheritance tax (IHT) issue. If you are a single person with no children, the maximum your estate can be worth before IHT is due is £325,000. If, however, you are married with children you each would have your Nil Rate Band which is £325,000 and also a residence Nil Rate Band which can be up to £175,000 per person, so potentially your estate could be worth £1m before any IHT would be due.
By making gifts during your lifetime, you can effectively reduce the value of your estate. The annual gift allowance lets you give up to £3,000 immediately free of IHT. Unused allowance carries over just one year. For those with children there is also the marriage allowance which is £5,000 and £2,500 if this is a grandchild.
There is also a ‘seven-year rule’, meaning gifts of any value are exempt from IHT if you live for at least seven years after making it. We would suggest when making any gifts that you keep a diary of the gift made and to whom as this can help when tax planning.
There can be other tax considerations involved with the gift of assets so if you’d like to discuss the potential Inheritance Tax liable on your estate and the many ways you are able reduce it, please contact us.
Consider a salary sacrifice
A salary sacrifice is an especially tax-efficient way for you to make pension contributions and to save and reduce your Income Tax and National Insurance. With this in mind, it is well worth considering exchanging part of your salary for payments into an approved share scheme or additional pension contributions.
There is little time left to make use of these valuable tax allowances. Some currently roll over, others don’t. If you can, it’s advisable to make use of every allowance you’re presented with whilst its available.
If you would like to discuss how best to manage your tax planning opportunities, please do not hesitate to contact us – email@example.com – 01334 654030