Make sure is use your income tax, capital gains tax, and savings allowances or you will lose most of them before April 2023.
CAPITAL GAINS TAX (CGT)
Use it or lose it: We each have a £12,300 annual capital gains tax allowance in 2022/23. This is falling to just £6,000 from 6th April 2024 and £3,000 from 6th April 2025.
If you have made profits on investments that will likely get caught by CGT, then it may be worthwhile ‘bed and breakfasting’ them i.e., selling them today and buying back 31 days later (you used to be able to buy back the next day) within any capital gains tax exemption each year. This may mean none or reduced CGT if you sell assets and buy them back every year, within tax free allowances.
Don’t forget that you can make unlimited transfers between spouses without triggering a capital gains tax event, so make sure all your investments are in the right names for tax efficiency.
Losses – make sure you record and document capital losses with HMRC as losses can be carried forward indefinitely. You may already have made losses in the past that could be offset against gains this year (provided they are in the same tax schedule e.g., you cannot offset capital losses on property against gains made in shares).
INHERITANCE TAX (IHT)
Make sure you use your £3,000 annual inheritance tax gifting allowance, you can gift more if you wish but it is £3,000 that drops outside the estate immediately, and the rest must wait for 7 years to drop outside the estate.
Make sure you use your inheritance tax yearly gifting limit of £3,000 each. In addition, if you did not use last year’s allowance that an extra £3,000 available i.e. total £6,000. This means couple could give away up to £12,000 and all would be outside your estate for inheritance tax immediately.
Make sure you use up unlimited £250 small gifts allowance, you can make this gift to as many people as you wish, and it is immediately outside your estate.
You can also make unlimited gifts from income, provided it does affect/reduce your standard of living.
SAVINGS AND INVESTMENTS
Personal Savings Allowance
You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.
To work out your tax band, add all the interest you’ve received to your other income.
Starting Rate Savings Allowance
You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
If your other income is £17,570 or more: You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
If your other income is less than £17,570: Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
Help to Save Scheme
Help to Save is a type of savings account. It allows certain people entitled to Working Tax Credit or receiving Universal Credit to get a bonus of 50p for every £1 they save over 4 years. This savings scheme is backed by the government, and you get bonuses at the end of the second and fourth years. They’re based on how much you’ve saved.
ISA Allowance £20,000, Junior ISA Allowance £9,000. Lifetime ISA Allowance £4,000 (this counts towards your £20,000 main ISA allowances and also attracts a 25% bonus). Use them or lose them.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) attract 30% income tax relief for investments. VCT annual allowance £200,000. EIS annual allowance £1 million or £2 million if at least £1 million of that is invested in ‘knowledge-intensive’ companies.
Seed Enterprise Investment Schemes (SEIS) have an annual allowance of £100,000 and attract 50% income tax relief.
Insurance investment bonds may be of interest to defer taxation or assign investments to others in a lower tax position which means they may be able to take gains without any further tax due.
PENSION CONTRIBUTIONS TO REDUCE INCOME
We have already covered the use of Pension Annual Allowances, tax relief and using Carry Forward of Unused Pension Tax Relief Allowances for the last 3 years.
See Get £15k Back TYE 22/23 Tax Relief TYE 22/23 Carry Forward TYE 22/23
Watch your income levels when planning pensions – use pensions to reduce your ‘earnings’ into new tax brackets or save allowances.
Tapered Annual Allowance: For every £2 above the Adjusted Income Threshold of £240,000, your pension annual allowance is reduced by £1. What this means is without early action if your package is worth more than £240,000 your pensions annual allowance could fall to as low as £4,000 resulting in huge tax charges if you/your employer are making significant pension contributions.
Losing Personal Tax Allowance: For every £2 you earn over £100,000; your personal tax allowance (£12,570) is reduced by £1. This means that if you earn £125,140 you have zero personal allowance, that’s an equivalent tax rate of over 60%. By making pension contributions early, you can reduce your earnings to below £100,000 and get your full personal allowance back.
Child Benefit: If you earn more than £50,000 pa, you start to have child benefit reduced. If you earn more than £60,000 your child benefit is reduced to zero. By making pension contributions to keep your income at or below £50,000 you protect your child benefit.