Richardson Swift: Personal Tax – Don’t Pay More Than You Have To

With the ‘mini-budget’ changing income tax levels, only for some of those changes to be reversed within days, we could all be forgiven for some level of confusion around our personal tax situation.  Even so, chartered accountant and tax advisor Calvin Healy, from Bath-based firm Richardson Swift, says this is the best time of year to review your finances to make sure you never pay more than you have to.

The next financial year end maybe several months away, but experience shows us that if you want to avoid paying unnecessary taxes and make the most of your allowances, this is the time to start planning.

Tax planning strategies are usually most effective when implemented before the tax year begins, so here are some key areas that you might want to take advice on now.

Income tax
Personal income of between £100,001 and £125,140 is taxed at an effective rate of up to 60% due to the loss of the personal allowance, while income over £150,000 will now continue to be taxed at 45%. Child Benefit is tapered for incomes between £50-60k so for a taxpayer with two children who receives Child Benefit of £1,827.80 per year, the effective rate of tax is 58.3% in this income bracket, while for those with three children who receive Child Benefit of £2,555.80, the effective rate of tax is a whopping 65.6% for income between £50-60k.

Taking steps to reduce taxable income to below these levels is the best way to avoid the higher rate of tax. Increasing your pension contributions might be an effective way to do that. Alternatively, you could consider transferring an income-generating asset to a spouse with lower income, deferring income to a later tax year, or making Gift Aid payments.

Ensuring married couples/civil partners both have sufficient income to use their full personal allowance: £12,570 in 2022/23 or claim the Marriage Allowance where it is not possible to redistribute income, will result in tax relief of up to £252 for the current year. No tax is payable on transfers between married couples or civil partners, unless you are formally separated, in which case specialist advice is required.

You could replace investments that provide taxable income and gains with tax-free investments such as ISAs or investment bonds that allow valuable tax deferment. Speaking to a financial adviser will help you decide what investments work best, based on your specific circumstances.

Changing the distribution of investment capital between spouses/civil partners may help to reduce the tax incurred on income and capital gains. Again, transfers between married couples and civil partners will not incur tax.

Capital Gains Tax
For most people the Capital Gains Tax allowance is £12,300 this tax year. Any assets that are sold at a loss can reduce gains for the year or be carried forward and set against future capital gains.

Importantly though, any of the annual exemption not used cannot be carried forward and will be lost. Assets can be transferred between spouses and civil partners tax efficiently prior to being sold to ensure both exemptions are used fully.

You can also choose to defer the Capital Gains Tax payment for a year disposing of an asset after 5 April 2023. Alternatively, you can use two annual exemptions in succession making one disposal before 6 April 2023 and one just after.

IHT-free gift allowances
Individuals have an annual Inheritance Tax-free gift allowance of £3,000. This means you can give one gift of up to this amount away each tax year to whoever you want and there will be no tax charged on it should you die.

This can be carried on for one year but will be lost if it remains unused after that. If you have an annual exemption that you’ve carried forward from last year, it must be used before 6 April 2023.

You can also make gifts of up to £250 to an unlimited number of recipients each tax year, free from Inheritance Tax (IHT). This only applies, though, if the recipients have not received any part of your £3,000 IHT-free gift allowance.

So, giving money to children or other family members is a great way of supporting them and avoiding paying more money to the taxman.

Annual pension allowances
Investments in your pension are free from income tax and capital gains tax, but there is a limit to the amount you can pay in. This limit can vary depending on your income and circumstances, so for those with high levels of income it is always best to consult a tax adviser before making any decisions. The carry forward rules mean you can make use of any annual allowances that were not used for up to the last three years. That makes 5 April 2023 the last opportunity to use unused allowances from 2019/20.

If your adjusted income – that’s your taxable income plus employer pension contributions – is over £240,000, your annual tax-free pension allowance falls away by £1 for every £2 of income. There is a minimum tax-free pension allowance of £4,000 for those with adjusted income of more than £312,000.

You can also pay up to £3,600 into a pension pot for your spouse, a civil partner or a child, and as long as they have no earned income of their own, benefit from basic rate tax relief on the contributions. Again, get advice before doing this because the situation can be change based on an individual’s circumstances.

Savings & investments
If you earn less than £150,000, you should try and ensure that savings income for both your spouse or civil partner is high enough to use your full £500 or £1,000 personal savings allowance. You also get a £2,000 dividend allowance.

Shareholding directors of private companies can pay themselves up to £2,000 of dividend income for 2022/23 tax-free.

If interest on investments or savings is due to be paid just after 5 April 2023, closing the account before the end of the tax year can bring the interest forward. That will allow you to use up any surplus personal savings allowance you have for the current tax year.

You should increase your savings if necessary to make the most of the £20,000 tax-free ISA allowance per person. Married couples can invest £40,000 over the year with no capital gains tax or income tax to pay. Any unused allowance cannot be carried forward, however. Again, speak to a financial adviser about investments ahead of time to ensure you are making decisions that best meet your individual needs.

Tax-efficient investments
Income tax relief can be used to reduce your tax liability on the following investments:

Venture Capital Trusts (VCTs) – Investments of up to £200,000 per year qualify for income tax relief at 30%. There’s no capital gains tax payable on any profit made when selling the investment and dividends are received tax-free.

Enterprise Investment Scheme (EIS) – Annual investments of up to £1 million in qualifying companies attract income tax relief at 30% (or up to £2 million if at least £1 million is invested in knowledge intensive companies). If the investment is held for over three years, then any capital gain is free from CGT. If there is CGT due on gains from the investment, this can be deferred until the investment is disposed, if this helps your tax planning.

Seed Enterprise Investment Scheme (SEIS) – Investments of up to £100,000 per tax year can be made in start-up companies that qualify for the SEIS. This is due to go up to £200,000 in April ’23. Income tax relief is available at 50%. No CGT is payable on disposal if the investment is held for more than three years.

Both EIS and SEIS investments can be carried back to the prior year to obtain income tax relief available but not used in the prior tax year.

It should be noted though that these benefits must be balanced against the fact that both EIS and SEIS are considered ‘risky’ investments, as new businesses do not always succeed.

Trading and property allowances
Two £1,000 tax-free allowances are available, one for income from property and the other from trading and miscellaneous income. They can reduce your tax liability if you generate a modest income, for example, by renting out a room on Airbnb or selling items on eBay or Amazon.

If you have had to work from home due to Covid-19, you can claim tax relief worth up to £125 for the additional household expenses incurred such as heating and business calls. Tax relief can also be claimed on your usual business expenditure such as professional subscriptions and business miles travelled in your own vehicle.

Electric cars
If you are thinking of switching to an electric car for business use, the tax benefits are well worth exploring and include enhanced capital allowances, lower benefits in kind (determined by the vehicle’s CO2 emissions and fuel type) and £0 road tax for 100% electric vehicles until at least 2025.

Gift Aid
Tick the box to say you are a UK resident and taxpayer when making Gift Aid payments and as a high rate taxpayer you’ll receive 20% or 25% of the donation as a reduction in your tax liability. To make the most of Gift Aid, the person with the highest tax rate in your family should ideally make the payment.