Sarah Bradford highlights some year-end tax planning tips to ensure valuable allowances are not wasted.
As the tax year draws to a close, it is time to take stock and undertake any last-minute tax planning. This should include a review of available allowances for the 2022/23 tax years and consideration of the extent to which they have yet to be used. Many allowances are lost if they are not used in the tax year in question. Where this is the case, the taxpayer has until 5 April 2023 to use up any remaining 2023/23 allowances before they are lost.
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Personal allowances
The personal allowance is set at £12,570 for 2022/23. It is frozen at this level until 6 April 2028.
The personal allowance is lost if it is not fully utilised in the tax year. Where the allowance remains available, consider whether it is possible to advance income so that it is received before 6 April 2023 rather than on or after that date. Where the taxpayer has a personal or family company, paying a bonus or an additional dividend may prevent the allowance from being lost and free up some of the 2023/24 personal allowance. In a family company situation, it may also be possible to tailor the amounts paid to different family members to utilise available personal allowances and basic rate bands.
If the personal allowance cannot be used and the recipient is married or in a civil partnership, as long as their spouse or civil partner pays tax only at the basic rate, the marriage allowance can be claimed to transfer 10% of the personal allowance (rounded up to the nearest £10) to the spouse or civil partner. For 2022/23, the marriage allowance is £1,260. Claiming the marriage allowance will reduce the transferor’s personal allowance for 2022/23 to £11,310 and increase the transferee’s personal allowance to £13,830. This will save the couple up to £252 in tax (£1,260 @ 20%).
At the other end of the income scale, the personal allowance is reduced by £1 for every £2 by which adjusted net income exceeds £100,000, being lost entirely once income reaches £125,140. The combined effect of the loss of the personal allowance and the 40% tax rate that applies at this level means that the marginal rate applying between £100,000 and £125,140 is 60%. This is to be avoided if at all possible. Consideration could be given to making pension contributions or charitable donations to reduce adjusted net income and preserve some or all of the personal allowance. There may also be scope to transfer income to a spouse or civil partner, for example, by making a form 17 election for property income to be taxed by reference to beneficial ownership where this is other than 50:50 and the partner with the lowest marginal rate holds the greater share, or by changing the bonus structure in a family company in favour of the lower-earning spouse or civil partner.
Dividend allowance
The dividend allowance is available to all taxpayers regardless of their marginal rate of tax. Dividends sheltered by the allowance are taxed at a zero rate. The dividend allowance is set at £2,000 for 2022/23, but it is to fall to £1,000 for 2023/24 and to £500 for 2024/25.
In a personal or family company scenario, where some or all of the dividend allowance is available, if retained profits permit, consideration should be given to paying a dividend prior to 6 April 2023. It will be beneficial to advance a dividend planned for 2023/24 where, because of the lower dividend allowance applying for that year, it may not be sheltered by the dividend allowance if paid in 2023/24 but would be tax-free if paid in 2022/23. Dividends can be paid to family shareholders to use up their dividend allowances, but remember that where an alphabet share structure is not in place, dividends must be paid in accordance with shareholdings.
Personal savings allowance
The personal savings allowance is available to basic and higher-rate taxpayers to offset against interest from savings. Basic-rate taxpayers have a personal savings allowance of £1,000 for 2022/23, and higher-rate taxpayers have a personal savings allowance of £500.
With rising interest rates, taxpayers may find that the interest they have received exceeds their personal savings allowance in 2022/23 where it has not done previously. Consideration could be given to moving savings into ISAs or perhaps purchasing shares where the dividend allowance is not used. Financial advice should be sought first.
Spouses and civil partners could also assess how their savings are held to ensure that, where possible, interest is covered by the savings allowance, for example, by transferring savings held by a partner paying tax at the additional rate to his or her spouse or civil partner paying tax at the basic rate.
Pension annual allowance
Individuals are able to make tax-relieved pension contributions to a registered pension fund each year to the value of 100% of earnings (or, if higher, £3,600), subject to having sufficient annual allowance available to shelter the contributions.
The annual allowance is set at £40,000 for 2022/23. Where the allowance is not used in the tax year, it can be carried forward for three years. However, the current year’s allowance must be used before any brought forward allowances. Any allowances for 2019/20 will be lost if they are not used by 5 April 2023. Where income permits, consideration should be given to making pension contributions of £40,000 plus any unused annual allowance from 2019/20 in 2022/23. Employer contributions count towards the allowance. Care should be taken to ensure that total tax-relieved pension savings do not exceed the lifetime allowance, set at £1,073,100.
High earners have a reduced allowance. Where adjusted income exceeds £240,000 and threshold income exceeds £200,000, the annual allowance is reduced by £1 for every £2 by which adjusted income exceeds £240,000 until the minimum amount of the annual allowance, set at £4,000 for 2022/23, is reached. This means that anyone with threshold income in excess of £200,000 and adjusted income in excess of £312,000 receives only the minimum annual allowance of £4,000.
A reduced allowance of £4,000 (the money purchase annual allowance) applies where a person has flexibly accessed their pension pot on having reached age 55.
Capital gains tax annual exempt amount
The capital gains tax annual amount is set against net gains for the tax year (chargeable gains less allowable losses), reducing the amount charged to capital gains tax. Each individual has their own annual exempt amount. This is set at £12,300 for 2022/23 and is lost if not used by 5 April 2023.
Where the exempt amount for 2022/23 remains available, consideration should be given to accelerating disposals giving rise to a gain so that they fall in 2022/23. This is particularly important this year as the annual exempt amount falls to £6,000 for 2023/24. It is further reduced to £3,000 for 2024/25. Making the disposal after 6 April 2023 may increase the amount of the gain that is taxed.
Although spouses and civil partners cannot transfer unused annual exempt amounts between them, they can make use of the no gain/no loss transfer rules to transfer an asset or a share in an asset prior to disposal to take advantage of available annual exempt amounts.
Inheritance tax annual exempt amount
Individuals can make £3,000 worth of gifts each tax year free of inheritance tax. If unused, the inheritance tax annual exempt amount can be carried forward one year before it is lost. If no gifts were made in 2021/22, gifts totalling £6,000 can be made free of inheritance tax in 2022/23.
Practical point
Review available allowances for 2022/23 and consider whether these can be used before they are lost.
