Year end tax planning checklist for individuals
Income tax (avoiding the 60% effective rate)
The tax-free personal allowance for the 2022/23 tax year is £12,570 and will remain frozen at this level until 5 April 2028 across the UK.
For UK tax payers (excluding Scottish tax payers) the basic rate is frozen at £37,700 for the same period of time. Consequently, the starting point at which you would pay the higher rate will be £50,270 until 2028.
The additional rate threshold will come down from £150,000 to £125,140 from 6 April 2023, thereby bringing more income within the highest income tax rate of 45%. This equates to a potential increased tax liability of approximately £1,200 per year. It may therefore be worth considering bringing forward income where feasible before the threshold is lowered.
The personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This is known as ‘adjusted net income’ and means if you’re earnings are in excess of £125,140, then you don’t get the personal allowance. It also means the effective rate of tax on your income in the £100,000 – £125,140 range can be up to 60%!
Income tax band 2022/23__________Income tax rate 2022/23
Personal allowance
Income up to £12,570 ______________________0%
Basic-rate
Income of £12,570 – £50,270_______________20%
Higher-rate
£50,271 – £150,000_________________________40%
Additional-rate
> £150,000 ________________________________45%
Income tax band 2023/24 _______ Income tax rate 2023/24
Personal allowance
Income up to £12,570 _____________________ 0%
Basic-rate
Income of £12,570 – £50,270_______________20%
Higher-rate
£50,271 – >£125,140_______________________40%
Additional-rate
> £125,140________________________________45%
You can avoid this issue potentially through pension contributions and gift aid. The government encourage saving for retirement through tax relief on pension contributions. This means you can use these contributions and donations to plan and potentially ensure your income doesn’t breach £100,000 and incur the 60% effective rate of tax.
Where applicable, you should also consider the potential transfer of 10% of the personal allowance between spouses, or civil partners, where one has income below the personal allowance and the other is a taxpayer.
If you’re in business with your spouse then you could look at the profit sharing arrangements. Alternatively if self-employed, and your spouse works in the business, you could increase their wages assuming that is commercially viable, and reflective of the work being undertaken. It’s important that any of the above measures are compliant with the relevant legislation. Be sure therefore to seek professional advice.
Make use of the marriage tax allowance
If you’re a married couple, or in a civil partnership, check if you qualify for the marriage allowance. It could save you £252 per year in tax. Furthermore, you could back date your claim by up to 4 years, if you haven’t made use of the allowance in that time frame, potentially saving you up £1,008.
According to HMRC, more than 2m couples could be missing out, and 4.2m can gain from the allowance. It applies where one partner earns below the income tax personal allowance of £12,570, and the other partner pays basic-rate income tax. You have to be married, or in a civil partnership, if you’re cohabiting then you won’t be eligible.
The allowance means £1,260 of a partners personal allowance is transferred to the spouse, or civil partner, that is earning more. There are certain qualifying conditions in order to be able to make this election, one of which is that you cannot be a higher, or additional, rate tax payer.
One partner may pay more tax than the other, but as a couple, you’ll likely pay less. Plus, once you’ve applied, you automatically get the tax break every year, until you choose to withdraw it.
High Income Child Benefit Charge
If you, or your partner, receive Child Benefit payments from the state, and you have income greater than £50,000, then the High Income Child Benefit Charge (HIBC) kicks in.
Retaining tax free childcare
Eligibility for tax free childcare is lost when one parent’s income is above £100,000. Pension contributions and gift aid donations are, however, deductible in calculating the £100,000 income figure. Therefore following this strategy may result in tax free childcare being retained.
Tax free childcare is worth up to £2,000 per year so this is definitely something to consider if you are close to the £100,000 threshold.
For the 2022/23 tax year you can take £2,000 worth of dividends from your business, at a tax rate of 0%. Known as the dividend allowance, this is set to fall, meanwhile dividend tax rates rose in 2022/23. The result is it’s more expensive to extract profits from a limited company by following a dividend strategy.
From 6 April 2023, the dividend allowance will reduce to £1,000, and then fall again to £500 from 6 April 2024. If you don’t make use of it, then the allowance can’t be carried over to the next tax year and you will lose it. Therefore, it makes sense to use the allowance, if you’re able to do so.
Above the allowance, the dividend tax rates are as follows:
Income tax band 2022/23 Dividend tax rate 2022/23
Dividend allowance
Income up to £2,000___________________0%
Basic-rate
£12,570 – £50,270____________________8.75%
Higher-rate
£50,271 – £150,000__________________33.75%
Additional-rate
> £150,000__________________________39.35%
Income tax band 2023/24___Dividend tax rate 2023/24
Dividend allowance
Income up to £1,000__________________0%
Basic-rate
£12,570 – £50,270___________________8.75%
Higher-rate
£50,271 – £125,140_________________33.75%
Additional-rate
> £125,140_________________________39.35%
Be sure to generate sufficient income from dividends to make use of the allowance and basic-rate. Also, you may need to look at the timing of the distribution of dividends to achieve this.
The changes to the allowance and the rates means dividends are no longer so advantageous as they used to be. This is particularly the case for director-shareholders that relied on a combination of a basic salary, combined with dividend payments.
It would be wise therefore to budget for the additional tax liability that you’ll incur through the balancing payment due by 31 January 2024, in addition to the payments on account for 2023/24.
Capital Gains Tax and use of allowances
If you’ve sold a capital asset, or assets, for profit then you currently benefit from an allowance of £12,300. After this the Capital Gains Tax (CGT) rate you’re charged depends on the asset you’ve sold and your tax band. As with the dividend point above, your CGT allowance can’t be carried forward meaning it makes sense to make use of it for your gains every year.
Tax band ______ CGT on residential property CGT on other assets
Basic-rate _____________18% ________________________10%
Higher/Additional-rate__28% ________________________20%
The CGT annual allowance is set to reduce over the next 2 tax years.
The £12,300 exemption will reduce to £6,000 from 6 April 2023, and then drop again to £3,000 from 6 April 2024.
If one spouse is a higher rate taxpayer, and the other hasn’t used their basic rate band to its entirety, then assets could potentially be transferred. This means you could then access the 10% tax rate (if the asset is not a residential property), rather than being subject to 20%.
Where you’ve sold a residential property, remember that the gains must be reported and paid to HMRC within 60 days of the sale. If you own more than 1 home, you may need to consider electing one of them as a principal private residence (PPR). Any gains on the sale of your PPR are usually exempt from CGT. You have 2 years in which to make an election.
Separation/Divorce
The current rule is assets can only pass between separated spouses and not be subject to CGT in the year of permanent separation. Any transfers after this could result in a CGT liability.
These rules are due to be updated from 6 April 2023. They will then provide separating couples, up to 3 years from the end of tax year of separation in which to transfer assets, and benefit from nil gain, nil loss, treatment.
Inheritance Tax and gifting within exemptions
For Inheritance Tax, the ‘nil rate band‘ (what can be passed on through an estate before IHT is applicable) will remain frozen at £325,000 until April 2028.
Above this level, IHT is usually charged at 40% on assets, including money, that you leave to your beneficiaries.
There is a separate and additional nil rate band known as the ‘residence nil rate band’ which is applicable when considering the family home. If you’re passing this property to a lineal descendant, or a spouse/civil partner of a lineal descendant, then you get a main residence band of £175,000. This works to then potentially raise your total IHT nil rate band to £500,000.
Common exemptions:
- A gifting annual exemption up to £3,000, which if unused in a tax year can be carried forward and used in the following year
- Small gifts that can be given to as many people as you want in a tax year with a worth up to £250 each
- Wedding gifts up to £5,000 for your child, £2,500 for a grandchild, and £1,000 for anyone else
Stamp duty changes
The changes to stamp duty, which came into effect on 23 September 2022 remain in force until 31 March 2025. This means if you’re a first time buyer, you won’t need to pay stamp duty on the first £425,000 of the property you purchase, provided the property is worth £625,000 or less. This is up from £300,000 previously.
For existing homeowners, stamp duty kicks in at £250,000, up from the prior level of £125,000.
Property Investments and the calculation of taxable income
If you have a buy-to-let property and you’re a higher, or additional rate taxpayer then you’ll only be able to claim relief on the interest at the basic rate. This rule came into effect from 6 April 2020. It means your property income for tax purposes will no longer be fully reduced by any mortgage interest you pay.
Your taxable income could then exceed thresholds and that could reduce your personal allowance, giving rise to a greater tax liability.
Savings and Individual Savings Accounts (ISAs)
You can shelter savings interest from the taxman in banks, building societies, unit trusts, and trust funds, through the savings allowance.
Income tax band 2022/23_____Income tax band 2023/24 Savings allowance
Basic-rate
£12,570 – £50,270 ______________ £12,570 – £50,270 ____________ £1,000
Higher-rate
£50,271 – 150,000_______________ £50,271 – £125,140 ____________£500
Additional-rate
> £150,000 __________________________> £125,140__________________£0
You can also invest up to £20,000 in an Individual Savings Account (ISA) in any given tax year.
Anyone over the age of 18 can open an ISA in the UK. Lifetime ISAs only apply to the under 40 age group, while junior ISAs are for children under the age of 18.
If you don’t use the allowance in that year then it is lost. If you, and a spouse, each make use of the annual ISA limit, then you’re able to save, or invest, £40,000 between you
Type of ISA__________________Annual limit for 2022/23
Cash ISA_____________________________£20,000
Stocks and shares ISA________________£20,000
Flexible ISA___________________________£20,000
Innovative finance ISA________________£20,000
Lifetime ISA___________________________£4,000
Junior ISA_____________________________£9,000
Income and capital gains generated within an ISA are exempt from taxation. Seek advice from an Independent Financial Advisor, or Financial Planner, prior to making any investments.
Investment in the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
Previously these schemes had a time limit of 6 April 2025 when they were originally legislated for. However, the government has committed to extend them beyond this date whilst also changing the rules to provide more generous reliefs.
If you purchase shares in a business that qualifies as an EIS investment, then your tax liability can be reduced, for either the year of investment, or the prior year, under a carry back claim by up to 30% of the amount you invested.
If you have capital gains from other disposals in the last 36 months, or the following 12 months, these can be re-invested in EIS shares resulting in the availability of CGT deferral relief. This defers the CGT until the new investments are subsequently disposed of.
Investment in SEIS provides income tax relief of up to 50% of the amount you invested in either that tax year of investment, or the previous tax year under a carry back claim. From 6 April 2023, the annual investment limit will double to £200,000.
Any gain under EIS, or SEIS, is usually CGT free if the investment is held for at least 3 years. If your shares are sold at a loss, you can set that loss against income tax for that year, or the previous year.
Prior to making an investment of this nature, it’s wise to go through advance assurance with HMRC to understand whether the company in question, and the investment, meet the conditions of the schemes. If you don’t go through this and HMRC subsequently decide the investment doesn’t qualify, this would prevent you from accessing the reliefs, leading to a greater tax liability.
Investment in Venture Capital Trusts
Venture Capital Trusts (VCTs) are specialist investments that offer tax breaks so that you can put money in small, high risk organisations and securities. Investment in VCTs offer:
- Income tax relief at 30% of the amount invested so long as the investment is held for a minimum of 5 years
- VCT shares are CGT exempt, assuming they rise in value
- Dividends on VCT shares are tax-free
Gains from other assets can’t be rolled into purchasing VCT shares. Similar to the point above in relation to EIS and SEIS, it would be wise to seek advance assurance from HMRC prior to any investment.
Pension savings
You have a lifetime allowance, on the total amount you can hold for all your pension funds, of £1,073,100. Since 6 April 2014, there has also been an annual allowance for pension contributions which currently stands at £40,000. The total for personal and employer contributions reduces by £1 for every £2 of an individual’s ‘adjusted income’ over £240,000 and can impact if your ‘threshold income’ from all sources is over £200,000.
Of note, if you have unused allowances from 2019/20, 2020/21, and/or 2021/22 then these can be brought forward and used in 2022/23. Paying in too much results in an annual allowance charge, at your marginal rate of tax.
After the age of 55, you can access your entire pension pot. Withdrawals have income tax implications and could result in you moving into a higher tax band.
Year end tax planning checklist for businesses
Corporation Tax
From 1 April 2023, Corporation Tax is set to rise to a main rate of 25% for some businesses. If your profits are greater than £250,000 then you will be subject to the main rate. Businesses with taxable profits less than £50,000 will be taxed at the current 19%.
If these thresholds are shared between associated companies, then they could be lower dependent on how many associated companies you have.
If your profits are between £50,000 and £250,000 then a tapered rate will be applied. The tax rate increases from 19% to 25% depending on the amount of profit, the main rate is reduced by marginal relief.
Tax efficiency through the Annual Investment Allowance
If you have the means of financing purchases, and acquiring capital assets, then this could reduce your tax liability by making use of the Annual Investment Allowance (AIA). The AIA ensures up to £1m of investment can be deducted in the year of expenditure from your profits before Corporation Tax is applied, when invested in qualifying assets.
The allowance was supposed to return to a level of £200,000 from 1 April 2023 but will now be maintained at £1m.
It might be worth bringing forward investment plans.
Or you may wish to wait until you can save tax at higher CT rates.
Commercial property
Are you intending to purchase commercial property, or furnished holiday lettings? If these contain fixtures, then capital allowances could be claimed. When a property is purchased, the value attributable to the fixtures has to be agreed through a joint election by the purchaser and the vendor. It might be worth seeking specialist advice to ensure any capital allowances are maximised.
Managing income
Look at managing your income so some of it falls into the following financial year. This might make sense if projections for the next year are not so good. If you can delay the completion of sales of goods or services, this can be tax efficient.
