As the tax year comes to an end, it’s crucial to start thinking about your tax planning strategies. With the new tax year starting on April 6th, 2023, there are a few things you can do to ensure that you’re taking advantage of all the tax benefits available to you. In this blog, we’ll cover some key tips to help you with end-of-year tax planning in the UK for 2022/23.
1. Maximise your ISA allowance
Individual Savings Accounts (ISAs) are a tax-efficient way of saving money. You can save up to £20,000 tax-free in the 2022/23 tax year, and the deadline for contributions is April 5th, 2023. If you haven’t used your allowance for this tax year, consider contributing before the deadline to maximise your tax-free savings.
2. Make pension contributions
Pension contributions are another tax-efficient way to save money. You can contribute up to 100% of your income or £40,000 (whichever is lower). You may also contribute up to £3,600 even if you have no relevant UK earnings. If you’re a higher earner, you may be subject to a reduced annual allowance. You can also carry forward unused allowances from the previous three tax years if available subject to your contributions not exceeding your net relevant earnings in the current tax year.
Making pension contributions can help reduce your taxable income, which could result in lower tax liabilities. This is particularly beneficial for higher-rate and additional-rate taxpayers and in light of the reduction in the higher rate tax band from £150,000 to £125,000 next tax year.
3. Utilise your capital gains tax exemption
If you’ve made gains from selling assets such as shares or property, you may be subject to capital gains tax (CGT). However, you can make use of your CGT exemption to reduce your tax liability. The CGT allowance for the 2022/23 tax year is £12,300. Next tax year it reduces to £6,000 and the following year to £3,000 so if you want to maximise your CGT exemption then consider using it before 6 April. Remember individuals each have an exemption. This is especially useful if you wish to gift assets from one spouse to another before selling them because this can potentially double your tax-free allowance from £12,300 to £24,600. Worth considering.
If you have unrealised gains that exceed your allowance, consider selling some assets before the end of the tax year to utilise your allowance.
4. Consider tax-efficient investments
Investments such as venture capital trusts (VCTs) and enterprise investment schemes (EISs) offer tax relief for investors. VCTs allow you to invest up to £200,000 and receive 30% income tax relief as well as tax-free dividends. EISs offer 30% income tax relief on investments of up to £1 million, it is free of IHT after two years and it can be used to defer, reduce and potentially eliminate capital gains tax on other assets.
EIS contributions can potentially be carried back to a previous tax year but only if the HMRC EIS tax approval certification is received before 5 April.
However, these investments come with higher risks than traditional investments, so it’s important to seek professional advice before investing.
5. Take advantage of gift aid
If you’re a UK taxpayer, you can make charitable donations through gift aid, which allows charities to claim an extra 25% on your donation. This means that for every £1 you donate, the charity receives £1.25, and you can claim back the additional 25% as tax relief.
To claim gift aid, you must have paid enough tax to cover the amount the charity will claim.
Interestingly you can carry back charitable donations to the previous tax year which may be worth considering if you were subject to a higher rate of tax last tax year.
In conclusion, end-of-year tax planning is crucial to ensure you’re taking advantage of all the tax benefits available to you. Maximising your ISA allowance, making pension contributions, utilising your capital gains tax allowance, considering tax-efficient investments, and taking advantage of gift aid are all effective tax planning strategies to reduce your tax liability.
It’s important to seek professional advice to ensure that your tax planning strategies are appropriate for your individual circumstances. With careful planning and execution, you can optimise your tax position and save money in the long run. You know it makes sense.*
The Financial Conduct Authority does not regulate tax planning. Venture capital trusts (VCTs) and enterprise investment schemes (EISs) are higher-risk investments so you should always take professional advice before investing in them. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.
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