Tax Planning

With the end of the tax year fast approaching, it’s a good time to organise your finances and make sure you make the most of your tax allowances, reliefs, and exemptions. Some of these allowances will be lost if you don’t use them before the end of the tax year. Additionally others will be reduced in the new tax year due to legislative changes.

This guide explains the main areas of planning you need to consider before the end of the tax year.

This year it’s important to note that the tax year end falls just after the long Easter weekend and therefore processing times may take slightly longer than usual. Our advice is always to beat the rush by being prepared and organised well in advance.

Individual Savings Accounts (ISAs)

• You can contribute up to £20,000 to your ISA in the current tax year.
• You need to use this allowance by 5th April 2024, or it will be lost.
• If your ISA is a ‘flexible ISA’ then you can also replace any withdrawals within the same tax year. Again, you need to do this by 5th April, or that additional ‘replacement subscription’ opportunity is lost.
• No tax is payable on any of the income or growth within your ISA, and you can usually withdraw money without penalty. Any money withdrawn can be replaced in the same tax year without using any of your allowance.
• Choose a Cash ISA if you are likely to need the money within a shorter timeframe (say, within 3-5 years). Interest rates have significantly improved in the last year so it’s worth shopping around.
• A Stocks and Shares ISA might be for you if you are seeking long-term growth and can cope with some potential market volatility. You can switch between Cash and Stocks and Shares later if you wish.
• Consider a Lifetime ISA (LISA) if you are saving for a first home.

Pension Contributions

• Pensions are extremely tax-efficient.
• You should make sure you take advantage of any pension funding offered by your employer.
• It’s worth making the maximum contribution to your pension, depending on your available allowances and personal budget.
• Check you are reclaiming higher and additional rate tax relief, particularly if you are making personal pension contributions.
• Higher and additional rate taxpayers can also use pension contributions to reduce their effective earnings, and bring them into a lower tax band.
• Make use of your carried forward allowances if available.
• If you have already taken taxable benefits from your pension, you might have triggered the Money Purchase Annual Allowance. If this applies to you, it’s even more important that you use your allowance before 5th April.
• Check if your remuneration will exceed £260,000 (including employer pension contributions) as this will also reduce your annual allowance.

Income Tax Allowances

You have a number of income tax allowances that can help to increase your net household income. If you arrange your income and assets efficiently, there is still time to make the most of these before the end of the tax year. For example:

• Personal Allowance – you can earn up to £12,570 before paying tax. If you are taking income from a pension, or planning a withdrawal from a bond, you can use this allowance to offset tax. Similarly, if you own a business, it’s a good idea to take some of your income as a salary to make use of this allowance.
• Marriage Allowance – a lower-earning spouse can transfer up to £1,260 of their tax-free personal allowance to their higher-earning partner, potentially reducing the family’s tax bill by up to £252.
• Dividend Allowance – dividends of up to £1,000 per year may be drawn (from your own company or from investments) without tax liability. This is reducing to £500 from April 2024, so if you have retained profits in a company, it’s worth making the most of this now.
• You can transfer assets to your spouse if they pay a lower rate of tax, or to make use of both savings allowances.

Capital Gains Tax Exemptions

• When you sell investments or property, you might need to pay Capital Gains Tax (CGT) on the profits.
• You can use your annual exemption to avoid building up large taxable gains. This tax year, you can realise gains of up to £6,000 without paying tax. This is reducing to £3,000 from April 2024, so you could save tax by realising more in the current tax year.
• Sell shares to realise a loss. The loss can be carried forward to set against gains in future years.
• Allocate some shares to a spouse. This does not incur tax, and means that you have double the exemption to set against gains.

Inheritance Tax Planning

• You can reduce your estate (and potential IHT liability) by making gifts to individuals, charities, or trusts. Charitable gifts are immediately outside your estate.
• You can gift up to £3,000 per year, which is immediately outside your estate. You can also carry forward this allowance by up to one tax year. A couple could potentially gift up to £12,000 by using two tax years’ worth of allowances. Some other exemptions are also available.
• If no exemptions apply, most gifts drop out of your estate after 7 complete years, so making the gift now starts the clock ticking earlier.

Tax Advantaged Investments

• Consider investing in smaller, early-stage companies. This can be done via Alternative Investment Market (AIM) listed shares, Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT). These are very high-risk investments and are only suitable for experienced investors who can afford to lose the money. Advice is strongly recommended.
• Investing in this type of asset could reduce your income tax bill by up to 30% of the investment amount, or 50% if the investment is allocated to a particularly high-risk version of the EIS.
• An EIS investment offers the added advantage of being able to carry-back relief to the previous tax year, as well as the option to defer CGT on gains realised from other investments.
• AIM and EIS investments are also considered to be business assets and are usually subject to 100% Inheritance Tax relief if held for at least 2 years.

Charitable Gifting

• Make any charitable gifts you were planning before the end of the tax year. Gift Aid can increase the value of the gift in the hands of the charity, as well as reducing your tax bill.
• Remember to claim tax relief on any charitable gifts made in 2022/2023, as you can carry-back tax relief to the previous tax year, providing this is done before your tax return is due. This can be useful if your tax bill was higher last year.
• Think about gifting shares. No capital gains tax is due either when you gift the shares, or when the charity eventually sells them.

Saving for Children

• Top up any Junior ISAs for your children or grandchildren. You can contribute up to £9,000 in the current tax year.
• Consider making pension contributions for your child. Anyone can contribute up to £2,880 per year (grossed up to £3,600) to a pension for tax-efficient growth.
• These gifts can be extra efficient if you use them in conjunction with your gifting allowances above, or as regular gifts from surplus income.

Please don’t hesitate to contact a member of the team if you would like to find out more about planning for the tax year-end.

If you are fortunate enough to receive a bonus this year, you may be considering ways to save tax. While a cash windfall is always welcome, your bonus might push you into higher rates of tax, meaning that you receive less than you were expecting.
Below, we explain how your bonus is taxed and some options for making savings.

Your Bonus – Tax Treatment

If you receive a bonus, this is added to your other income for the tax year to calculate your tax liability. This means you will pay tax on your bonus at your highest marginal rate.

National Insurance will also apply and if you have any other deductions from your salary, such as student loan repayments, these will also factor into the calculation.

A key point to be mindful of is that receiving a bonus can push you into the next tax band. Going from basic rate to higher rate tax can mean increasing your tax bill on the bonus by up to 20%.

If your bonus takes your earnings over £100,000, you will also start to lose your personal tax-free allowance of £12,570. This can take the effective tax rate on your bonus as high as 60%, as not only are you paying higher rate tax, but you are also extending the amount of income that is taxed overall.

Even if you have checked the tax treatment and are comfortable with the extra tax, remember to check your pay slip for emergency tax coding. Sometimes when you receive a one-off payment, HMRC will assume you will receive the same amount every month and adjust your tax code accordingly. This means paying significantly more tax, potentially for the rest of the tax year. It is normally corrected at the end of the tax year, or you can contact HMRC to receive a refund sooner.

How You Can Save Tax by Making Pension Contributions

Making a pension contribution is one way to reduce the amount of tax you pay on your bonus.

If your employer can arrange this through salary sacrifice, the administration is fairly simple. The bonus will be paid into your pension as an employer contribution and you won’t pay tax or National Insurance on it.

If your employer makes pension contributions via the ‘net pay method,’ your tax will be automatically reduced, but you won’t necessarily receive relief from National Insurance contributions.

If your employer is unable to pay the bonus into your pension, or you decide to make the contribution later, you can arrange a personal contribution. Basic rate tax relief is credited automatically, which means that for every £80 you contribute personally, HMRC adds a further £20. This means a gross contribution of £10,000 will only cost you £8,000 from net income.

There are, of course, limits to this. Pension contributions are generally capped at your gross annual earnings or the annual allowance (£60,000), whichever is lower. However, if you earn more than the annual allowance, you may be able to carry forward allowances from up to three previous tax years. This means that higher earners receiving a large one-off bonus have considerable scope to top-up their pensions.

The limits on pension contributions and tax relief available are explained further here.

Pensions are highly tax-efficient investments and do not incur any tax when the funds are invested. Currently, you can also pass the funds to your beneficiaries tax-free if you die before age 75. After age 75, any income drawn by your beneficiaries is simply taxable at their own marginal rate.

Are There Any Downsides?

The main downside to funding your pension is that you can’t access the money until your minimum retirement age. This is currently age 55, but is expected to rise to 57, and subsequently 58 as the State Pension is also due to increase.

At your retirement age, you can take up to 25% of your pension as a tax-free lump sum. The remainder is then taxed at your marginal rate. So, while you can substantially reduce the amount of tax you pay on your bonus, particularly if you move from higher to basic rate tax in retirement, you will probably still pay some tax on it eventually if you take benefits from your pension.

There is also the chance that the investments in your pension will be exposed to market volatility. You may even lose money, particularly if you make the an investment into equities close to your retirement age.

You also need to be mindful of pension allowances. Breaching the annual allowance means not only being taxed on the money as if it was earned income, but that the money is now tied up in a pension, to be taxed a second time if you take retirement benefits.

If you earn over £240,000 or have already taken benefits from your pension, you will have a lower annual allowance.

These risks can easily be addressed by careful planning, for example:

• Keeping enough cash to cover potential emergencies and any planned spending.
• Only investing if you can hold the fund for at least five years (ideally longer).
• Investing in a suitable range of funds which is well diversified and matches the appropriate risk level.
• Taking advice on larger pension contributions, particularly if you are a higher earner.

Other Options for Saving Tax

If you have maximised your pension allowances or wish to take a different route, there are a few other options to tax-efficiently invest your bonus, for example:

• ISAs – while you don’t receive any tax relief on your contributions, all income and growth are tax-free and you can access your savings flexibly. This might be a suitable option if you are likely to need the money before retirement age and are comfortable paying tax on the bonus.
• Venture Capital Trusts (VCTs) – these offer income tax relief of 30%, providing the relief is no more than your tax bill and you hold the investment for at least five years.
• Enterprise Investment Schemes (EIS) – similarly, these schemes offer income tax relief of 30% (as well as benefits in terms of capital gains tax and inheritance tax), with a minimum holding period of three years.
• Seed Enterprise Investment Schemes (SEIS) – these are a subset of the EIS regime and offer income tax relief of up to 50%. However, they are significantly higher risk as they target very early-stage companies.

The latter three options are very high-risk investments which invest in smaller companies. While the tax relief is a strong incentive to invest, you could lose some or all of your capital.

It’s a good idea to seek tax advice if you are considering higher risk investments or tax planning, as getting it wrong can cost much more than you saved.

Please don’t hesitate to contact a member of the team if you would like to discuss financial planning and tax.

Some employees are able to claim tax relief on work-related expenses if their employers have not already reimbursed these.

This can include items such as:

• work clothing and uniforms, including a laundry allowance
• any equipment required for their work
• professional fees and subscriptions (such as membership to professional bodies)
• using their own vehicles for work travel (not including the usual home to work commute)
• costs of working from home, if there is no other option

The gov.uk site has guidance on who can claim and what for. You’ll first need to set up a Government Gateway login, if you don’t already have one, and from there the process is relatively simple.

However, if you were to use a search engine, the Government’s own site might not be the top result. There are many claims companies, offering to help you claim the tax relief. These companies also advertise widely on social media, with a simple ‘click here’ to begin the process.

The claims companies will liaise with HMRC on your behalf, as your ‘agent’ and arrange any reliefs you might be eligible for. As you might expect, the claims companies charge, for their ‘help’, often taking a percentage of the tax reclaim before passing it on to you.

HMRC are urging individuals to apply directly themselves, online or, if by post, by form P87 only, as the information required is exactly the same as they would need to provide to the claims company in any case.

Invitation

Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with our team here at WMM.

You can call us on 01869 331469.