You have a range of tax-free allowances – use them, before it’s too late
As another tax year ends, Paul Haywood-Schiefer, a Senior Manager, shares a list of actions taxpayers may wish to consider before it’s too late
Use your allowances
“Remember you have a range of tax-free allowances. The first £12,570 of income is covered by your Personal Allowance and received tax free (unless your total income exceeds £100,000). A further £2,000 of dividend income is covered by a Dividend Allowance (if not already covered by the Personal Allowance) and there is no tax to pay (the dividend allowance itself will be reducing to £1,000 from 6 April 2023). For Basic rate and Higher rate taxpayers, they can also benefit from the Personal Savings Allowance, which means the first £1,000/£500 (respectively) of interest again is free from tax. Although you might not be able to do much about influencing the timing of when interest or dividends are paid, don’t forget these exist when preparing your tax return.
“You should also give consideration to using the Capital Gains Tax Annual Exempt Amount. You can receive up to £12,300 of capital gains completely tax free. Therefore, you might even just want to use this to then re-invest the gains. Be aware that going forward, this will reduce to £6,000 per annum from April, and down to £3,000 from April 2024.
“Don’t forget your ISAs. If you can then a useful way of making investments is to make full use of the annual limits for contributions to your ISAs as any growth, income, and gains within these are completely tax free. The annual maximum amount for an adult that can be saved in ISAs is £20,000 (though a Lifetime ISA has a maximum of £4,000 allowed, which uses part of your overall ISA allowance) in a combination of ways through both stocks, shares, innovative finance, or cash. However, don’t forget children up to the age of 18 can have a Junior ISA with a maximum of £9,000 that can be put into this in a tax year. That money does not need to be contributed by them and is a great way for you or grandparents/other members of the family or even friends to help your child save, as they cannot make any withdrawals until they reach the age of 18 (subject to a few exceptions).
“You can also use up your annual allowance for personal pension contributions. The amount you can put in will depend hugely on the amount of your income for the year, what that income is and what unused allowances you have from the three prior tax years. As a minimum a person can make pension contributions up to £3,600 (gross) in the year and an Annual Allowance up to £40,000 (if your income allows). Why making pension contributions is so beneficial from a tax perspective is twofold. The contributions you make to your personal pension fund are considered to be made net of basic rate tax and so the pension fund will claim the excess from the Government. i.e., you contribute £2,000 personally, the pension fund would claim an extra £500 from the Government (2,000 x 100/80 = 2,500). Further to this, higher and additional rate taxpayers can claim tax relief on the contributions through their tax returns, extending their basic rate tax band and giving relief up to 20%/25% (respectively) on the amount of the gross contribution. Further changes will arise on this next year with the annual allowance increasing to £60,000.
“Personal pension contributions and/or Gift Aid donations will also reduce a person’s ‘adjusted net income’ so there may be a benefit for those individuals whose income is between £100,000 and £125,140 where the Personal Allowance is reduced or for those with income between £50,000 and £60,000 who are subject to the High-Income Child Benefit Tax Charge. Again, care must be taken in relation to pension contributions not to exceed the annual allowance (including any available carried forward amounts).”
Turn a loss into a win
“If you don’t have gains for the year, then you might alternatively think about crystalising a loss. While a tax-free number of gains is great, following a turbulent year in the stock market, you have shareholdings sitting at a loss. If this is the case you could also consider crystalising capital losses. i.e., selling stocks at a loss so as to lock in (crystallise) that loss to carry forward against future gains. Crystalised capital losses act differently to in year losses, which are immediately set against any gains, regardless of the fact that you have a capital gains tax annual exempt amount (even to the point of wasting it so think carefully on this if you have already crystalised some gains in the tax year). Where a person has losses crystalised from an earlier year they will only ever reduce your gains to a maximum of the annual exempt amount so as not to waste any of it, even if they exceed this. The unused losses will then be carried forward again to offset against future gains and will be useful with the annual exempt amount shrinking.”
Help a worthy cause
“Making charitable donations under the Gift Aid scheme to registered charities is not just beneficial to them, it can also help reduce your tax bill. As with pension contributions, the tax benefits are the same in terms of an increase to your basic rate tax band. This time though they are deemed to be made net of basic rate tax, and it is the charity who will claim the extra 20% from the Government on top of your donation. Higher and Additional tax rate payers can then also benefit from their basic rate tax bands being extended by the amount of the gross donation as mentioned above. Care must be taken in relation to Gift Aid donations to ensure that you have paid sufficient tax to HMRC to have franked the donation, otherwise, you will pay the tax the charities claim via your tax return.
“Additionally, you can gift shares or certain assets (check before you donate) to a charity and reduce the amount of your income you are taxable on, by the market value of the assets you have gifted. As well as doing that, you won’t pay Capital Gains Tax on the gift of the asset.
“Closer to home you might want to utilise annual gift allowances for Inheritance Tax purposes. You have a general allowance of £3,000 of gifts per annum (if you didn’t make a gift the prior year that will be increased to £6,000) that will not be added back to your estate on death and give as many small gifts of £250 or less, per gift recipient, per annum (you can’t just give one person endless gifts of £250, its one per person).”
Act before rules change
“While this might be a small selection of people who can benefit (this will only affect those people in the bracket from £125,000 to £150,000). Some employers might consider accelerating employee bonus payments for employees who will be affected by the lowering of the point at which the 45% tax rate begins (£125,140 from April 2023). Where employers are looking to make bonus payments or they might even consider doing this as opposed to an increased salary for the following tax year, there is a potential 5% tax saving for the employee. i.e., if an employer is paying someone £130,000 now and would increase their salary to £140,000 in the following tax year, that £10,000 would suffer £4,500 of tax. However, if a bonus of £10,000 was given instead and the base salary remained the same, the £10,000 this year would suffer £4,000 of tax, a saving of £500.”
“If you know you are going to have a large tax liability for the year, you might consider investing in a tax efficient investment such as Enterprise Investment Scheme/Seed Enterprise Investment Scheme/Venture Capital Trust. Each have their own limits, requirements, and different tax reliefs. With Seed Enterprise Investment Scheme, it is possible to get up to 50% Income Tax relief on the value of your investment (to a maximum of £100,000 pa, this increases to £200,000 from April 2023), you can also use the reinvestment relief here to get 50% of the value of funds reinvested into the Seed Enterprise Investment Scheme as Capital Gains Tax exempt. Venture Capital Trust and Enterprise Investment Scheme investments both give Income Tax relief at 30% (subject to maximum investments of £200,000/£2,000,000 respectively).
“Enterprise Investment Scheme does not allow a Capital Gains Tax exemption, it does allow for a deferral of capital gains that are reinvested into Enterprise Investment Scheme shares (Venture Capital Trust does not offer either). Though a deferral may seem attractive at first sight, when the Enterprise Investment Scheme shares are sold, the gain will crystallise and will be taxable at the tax rates of the day. At present time, Capital Gains Tax rates are relatively low and so if the gain crystallises at a later date when rates have gone up, the deferred tax might be higher than what would be currently payable. For Enterprise Investment Scheme/Seed Enterprise Investment Scheme/Venture Capital Trust investments, the actual gains on those shares will be exempt so long as the shares have been held for the requisite holding periods to achieve this.
“What you have to remember with all of this is that tax is just one point on this, and investment decisions should never just be made on the basis of tax. So, think before you act.”
Would you like to know more?
If you would like to discuss any of the above, please contact your usual Blick Rothenberg contact, or Paul Haywood-Schiefer using the form below