As another tax year draws to a close, now is a good time to take stock and consider whether all allowances and reliefs have been maximised as far as possible and whether any action needs to be taken before the new tax year begins.
We have set out below our top ten tips to consider:
1. Owner managed businesses should review their remuneration package in advance of the new tax year and look to utilise their tax bands as far as possible. A combination of low salary, high interest and dividends could result in tax free income of up to £19,570 (and double that for couples) in 2023/24 and £20,570 in 2022/23, if structured appropriately and depending on the individual’s circumstances.
2. With the dividend allowance set to reduce from £2,000 to £1,000 from 6 April 2023, it should be ensured, where possible, that dividend allowances have been fully utilised by 5 April 2023. Spouse planning should also be considered, if not already a shareholder, to double the available tax free allowances.
3. As the personal allowance is reduced by £1 for every £2 of net income over £100,000, those with income of between £100,000 and £125,140 could end up paying tax at an effective rate of 60%. If your income is close to the threshold it may be worth considering ways to reduce your taxable income. This could be achieved by making pension contributions, charitable donations, deferring income into 2023/24 or transferring income producing assets to your spouse.
4. The personal savings allowance allows the first £1,000 of savings income to be paid tax free to basic rate taxpayers and the first £500 for higher rate taxpayers (nil for additional rate taxpayers with income over £125,140 from April 2023). Directors that have loaned money to the company, could consider paying a commercial rate of interest on the loan to utilise this allowance. Note that the company would have some compliance obligations to meet making the interest payments.
5. Taxable income exceeding £50,000 for the year could lead to a claw back of child benefit under the high-income child benefit charge. Once taxable income reaches £60,000 the benefit will be lost in full. Reducing, deferring or transferring taxable income as described above could help to preserve this benefit.
6. Up to £1,260 of your personal allowance can be transferred to a spouse or civil partner if neither of you are higher rate taxpayers, by virtue of the marriage allowance. This is of benefit where one spouse has income of less than the personal allowance (currently frozen at £12,570), with a tax saving of up to £252 per annum.
7. With 100% of mortgage interest relief for landlords restricted to the basic rate of tax, you may not receive full relief for your finance costs. There are several ways to minimise the impact of the rules including incorporation, spousal transfers, use of partnerships etc.
8. If you have any surplus cash, you could look to make a tax efficient investment. There are various options which typically offer income tax relief at 30% (but can be as high as 50%) and with tax free capital gains on disposal. It may also be possible to carry back an investment made in 2022/23 to 2021/22 to accelerate tax relief.
9. The capital gains tax annual exemption for all individuals is £12,300 for 2022/23 but reducing to £6,000 for 2023/24 and £3,000 from 2024/25. Consideration should be given to the transfer of assets between spouses such that both utilise their annual exemptions on a subsequent disposal. Claiming/crystalising capital losses could also help to offset future gains with the reducing allowances.
10. Consider utilising your pensions allowance, which enables you to contribute up to £40,000 for 2022/23, plus any unused allowance for the previous three tax years. Note, however, that if your adjusted income is more than £240,000, the allowance reduces by £1 for every £2 above this threshold down to a limit of £4,000. This reduction only applies where your ‘threshold income’ (broadly taxable income) is also over £200,000.
Please contact a member of the team if you would like further advice.