Strategic Insights │ Your tax year end checklist

Strategic Insights │ Your tax year end checklist

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Tax
Investments
Family
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Published January 17, 2023
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Planning for tax year end

A year or so into the Ukraine conflict and against a backdrop of continuing economic fallout from the pandemic, it looks as though all of us are going to “feel the pinch” one way or another. Just how much will vary from person to person, but conscientiously implementing a strategy to minimise your tax burden will stand you in good stead for being able to weather the challenges ahead.
Our advisors are available to help you optimise your financial affairs all year round. We consult, plan and execute alongside you so that you stay ahead of the curve and stray as little as possible from your roadmap to financial freedom. That said, February and March are particularly important months in the tax calendar. If you have not already done so, you should use the next few weeks to check in with us and make sure you have done everything you can to be as tax-efficient as possible before the year closes.
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Don’t sit on cash

Despite the volatility of the markets, sitting on mountains of cash is not necessarily the best thing to do: sure, you might be able to get a 4% return if you shop around and are prepared to lock your money away for a while. But the relative value of any mountain that you might manage to accumulate is crumbling by the day, and that is certainly not going to be offset by an occasional 0.25% increase in interest rates. Now really is a good time for long-term investors to add to their portfolio. In fact, we are more confident now than at any point over the last decade about the outlook for returns.
To give you a helping hand, here’s a quick tour of some of the opportunities available for efficiencies in areas like capital gains tax, inheritance tax, ISAs and pensions. So take stock, ensure that you have used all the allowances available… and act now if you haven’t.

Income tax and pensions

“The only thing that hurts more than paying income tax is not having to pay income tax”, according to Thomas Dewar. Even better is simply to reduce your taxable income. And there are ways of keeping it within certain bands to avoid paying a higher rate.
One of the time-honoured ways of doing this is by increasing your pension contributions. Given how high inflation currently is, this is an excellent way of preventing the value of your money from being eroded. And since pension freedoms were introduced in 2015, they now play a key role in planning a tax-effective retirement strategy. The annual allowance remains unchanged at £40,000 (with a lifetime allowance of £1,073,100). Furthermore, if you get a work bonus, you may be able to put some or all of that into your workplace pension. This could save you tax as well as (in some cases) National Insurance. We can talk you through all the options available and help you maximise the tax relief on your pension savings.
Even if you have reached your own £40,000 limit, remember that you can also potentially make contributions to your partner’s or children’s pensions. Provided they are a UK resident, individuals who have no earnings can still contribute up to £3600 gross (£2880 net). Don’t forget that you may be able to use unused annual pension allowances from the previous three tax years.
And remember, if you are a high-rate taxpayer, it’s up to you to claim the relief – not HMRC!
If you have taxable income-producing investments, then again, use your spouse / civil partner: investment capital can be redistributed between the two of you to reduce the rate of tax. Always consider sharing your taxable investment income with your partner. Love isn’t just a many splendored thing: it’s also highly tax-efficient!

Capital gains tax

Changes are afoot with capital gains tax. The allowance is about to be cut from £12,300 to £6000. And the following year it will be halved again to just £3000. That means that any profit you make above that amount will be taxable. So the race is now on to leverage that generous allowance for a final time. Remember that unused amounts cannot be carried forward from one year to the next. Any allowance you don’t use… you lose.
Again, spouses and civil partners are useful things to have when it comes to CGT: transferring ownership of assets to them is a useful way of reducing your tax bill.
On their own, this might not look like a lot, but all of these efficiencies add up.

Inheritance tax

Everybody has a £3000 annual exemption that they can use every tax year. Unused exemptions may only be carried forward for one tax year. So ensure that you use any available exemption from last year before the end of this tax year. There are, of course, other ways of minimising inheritance tax. Have a look at our article on trusts to find out more.

Savings and investments

If you are married or in a civil partnership, make sure that both of you have enough in the way of savings income to use your £500 or £1000 personal savings allowance. You also have a £2000 dividend allowance for investment income. If you are in the position of being able to control the dividend income that you receive (if you own your own business, for example), you could consider paying yourself up to £2000 in this tax year, and then £2000 next tax year.

Individual Savings Accounts

These have extremely favourable tax status. There are millions of pounds sitting in cash ISAs across the UK earning little or no interest, making their tax-privileged status pointless. Once you’ve considered all the investment risks, it’s got to be worth considering transferring this to a stocks and shares ISA. Remember that you can invest up to £20,000 each tax year, and ISAs are not subject to income and capital gains tax. If you have withdrawn any money from your ISA this year, you have until the end of March to replace what you have taken out, without your annual allowance being affected.

EISs and VCTs

Enterprise investment schemes (EIS) and venture capital trust (VCT) investments offer extremely valuable tax breaks to high earners. Investors should be aware of the greater investment risk (and lower liquidity) associated with the attractive tax relief that these provide.
You can invest up to £1 million in an EIS, or up to £2 million, provided any amount above £1 million is in a knowledge-intensive company (a company that is carrying out research, development or innovation at the time that it is issuing shares). The maximum tax relief available is 30%.
For Venture Capital Trusts, you can invest up to £200,000. Again, the maximum tax relief available is 30%. However, you cannot defer CGT, but dividends and capital gains generated on what you invest are tax-free.

Gift Aid

In these challenging times, many of our clients have generously lent their support to several commendable causes and charities. Don’t forget that if you are a higher-rate taxpayer, you can also claim an extra 25p for every pound that you donate to charity under the Gift Aid scheme. So if you donate £100 to a charity, the charity claims Gift Aid to increase your donation to £125. You pay 40% tax, so you can personally claim back £25 (20% of £125).

The Bottom Line

If we say this often, it’s because it’s true: maintaining good financial discipline, maximising appropriate tax advantages and having a clear financial plan tend to result in good financial outcomes.
The world is in a constant state of flux, and we can be pretty certain that domestic affairs and the geopolitical situation more widely will combine to create some challenges ahead. It is important to use all the various allowances, exemptions and tax wrappers available to us now – some could be lost in the future as legislation changes.
Investment Quorum does not know for certain what the future holds, but our advisers will work with what they know today to help you achieve your financial goals for tomorrow.
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