Well, Tax Year anyway!
Following the recent Budget there are some changes to allowances and pension funding rules, which have now come into effect. Here, we provide a summary overview of the allowances and reliefs available this tax year.
- Most people are entitled to a personal allowance of £12,570.
If your income is over £100,000 then you will see your allowance reduced by £1 for every £2 of income over £100,000. This means the allowance is lost completely lost once your total income is £125,140 or more.
Put another way, for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the personal allowance which effectively amounts to a 60% tax rate on income within this range.
- The additional rate threshold has been reduced to £125,140. This means that more people will find themselves paying more income tax as a result. However there are ways to reduce your income tax, for example, making pension contributions, making charitable donations or investing in investments which provide income tax relief. The right combination will depend on your personal circumstances.
- Marriage allowance – If you are a basic rate taxpayer and you’re married or in a civil partnership, you can transfer 10% of your personal allowance to your spouse or civil partner. When combined between a couple, this unused allowance offers an overall tax saving. However, there is a limit to how much can be transferred – this is currently £1,260.
- Dividend allowance – The annual dividend allowance has reduced to £1,000. This will be further reduced to £500 in April 2024. There are no changes to the dividend tax rates.
Regardless of your employment position, it is important to ensure that you are on the correct tax code, otherwise you could be paying too much tax (or not enough). You can contact HMRC or your accountant to doublecheck.
Tax efficient investments
- Individual Savings Accounts (ISAs) – ISAs are exempt from income and capital gains tax, which means they are a tax-efficient way to save. There are four types of ISAs available – cash ISA, stocks & shares ISA, innovative finance ISA and lifetime ISA. The annual subscription limit (for all ISA types combined) is £20,000.
A few providers offer ‘flexible ISAs’ which allow you to replace withdrawals within the same tax year, in addition to your standard annual ISA allowance.
- Growth-oriented unit trusts/OEICs –income tax rates are higher than the current rates of CGT, so it can be advisable, from a tax perspective for a higher/additional rate taxpayer, to invest in collectives geared towards capital growth as opposed to income.
- Single premium investment bonds – Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance, ignoring any charges. This may appeal to you if you are a higher/additional rate taxpayer now, but you are likely to pay tax at a lower rate in the future, due to how the gains are taxed.
- Enterprise Investment Scheme – an investment of up to £1 million (or £2 million provided anything above £1 million is in knowledge-intensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available provided some of the EIS investment potentially qualifies for income tax relief.
- Venture Capital Trust – offers income tax relief at 30% for an investment of up to £200,000 in new shares, again with tax relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are tax free, so, again, these investments may appeal to higher/additional rate taxpayers.
EISs and VCTs are high risk, illiquid investments and may not be suitable for everyone. It’s therefore important to take advice from a fully qualified financial planner with experience in these areas before investing.
Capital gains tax
- The Capital Gains Tax (CGT) annual exemption has reduced to £6,000, and will reduce again to £3,000 in April 2024. This will effectively mean that more people will find themselves paying CGT on their capital gains, making careful financial planning more important than ever.
- If you have made capital losses in previous tax years, to carry forward against future gains, you should make sure you report them to HMRC – you have up to 4 years after the end of the tax year that you disposed of the asset to report the loss. This can either be done via self-assessment or by writing to HMRC.
- The 19% rate applies to the first £50,000 of profits and a marginal rate of 26.5% applies to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate does not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax is 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)
Your financial planner and/or accountant will be able to offer advice on tax-efficient ways to extract your company profits.
- The Annual Allowance has increased to £60,000 for most individuals and you can use carry forward for up to three years of any unused allowances.
- For high earners the minimum tapered allowance has increased from £4,000 to £10,000, along with an increase in the assessment thresholds.
- Similarly, the Money Purchase Annual Allowance has also increased from £4,000 to £10,000 providing scope for further savings if you have flexibly accessed your pension benefits.
- Lifetime allowance – the Lifetime Allowance (LTA) charges have now been removed. This provides opportunities for those previously restricted by the LTA to recommence or increase their contributions. Those with Fixed or Enhanced protection can now make further contributions without impacting any tax-free entitlements.
However, it has already been well publicised that a different future government may well attempt to reintroduce lifetime restrictions.
- The freeze on the Inheritance Tax (IHT) thresholds remains in place and is expected to stay until 2028.
- The current nil rate band threshold is £325,000 and the residence nil rate band is £175,000.
- The residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2 million. If you are in this position, you might consider options to reduce your estate during your lifetime in order to reclaim at least some of the allowance.
Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469.
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
Source: Knowledge: Year End Tax Planning (techlink.co.uk)