Now that the frantic rush of year-end tax planning has been safely navigated, you can forget about it for another 11 months.
But here’s a better suggestion: why not start the tax year on the front foot with a spring clean of your finances? It’s much more advantageous (and less stressful!) than finding the time for another last-minute planning exercise on 5 April next year.
Here are my top five recommendations to maximise the reliefs and allowances available to you:
Make full use of ISAs
ISAs are one of the simplest and most effective ways to save or invest your money. Investments made within an ISA wrapper are exempt from both income tax and capital gains tax, so it makes sense to use your allowance as soon as possible. The sooner your money is inside an ISA, the sooner you can benefit from the tax efficiencies.
For the tax year 2022/23, the subscription allowance is still £20,000 per person. For a married couple, this allows you to invest a combined £40,000 tax efficiently.
You can also put up to £9,000 per child or grandchild into junior ISAs. These can be invested in the same fashion as your own stocks and shares ISA and, in due course, can be converted to ‘adult’ ISAs without losing any of the tax advantages. It’s a great way to pass money tax efficiently to the next generation.
Use your capital gains tax (CGT) exemption
Take advantage of your annual exempt amount (AEA) for capital gains. This is £12,300 again this year and will remain frozen at this level until 2026.
Despite some recent volatility, stock markets remain near all-time-high levels. The same is also true for property prices in many areas. So, it’s likely any seasoned investor will currently have considerable uncrystallised capital gains. Access to the new (AEA) could provide some much-needed flexibility to reshape your investment portfolio without setting yourself up for a CGT bill.
You could also consider selling investments that are not currently sheltered from tax and immediately repurchasing them within an ISA or pension wrapper. This will crystallise the current gain, with any future gains becoming exempt from CGT.
Revisit your inheritance tax (IHT) planning
Planning succession of assets is something no one likes to talk about, but it really is a topic where there is no time quite like the present.
Many IHT reliefs and allowances require assets to be outside of your estate for a certain period before they become exempt, so the sooner assets are gifted, the sooner the clock starts ticking.
Plus, at the beginning of each tax year, you have access to new tax-free gifting through annual exemptions. For instance, you can gift up to £3,000 this year which will be immediately excluded from the value of your estate for IHT purposes.
Other available allowances include regular gifts from surplus income, gifts on consideration of marriage, and a ‘small gift’ allowance of up to £250 per recipient.
Maximise the benefits of pension contributions
Adding money to your pension has both long-term and short-term benefits. It helps you provide for your retirement, and it can also help to reduce your tax bill this year.
If you’re at the point in your life where you’re increasing your pension contributions, consider whether you might look to pay in your full annual allowance.
You can also carry forward unused allowances from the last three tax years. It’s worth checking whether you used your full allowances each year, from 2019/20 onwards. It might mean you can tuck even more away in your pension.
If you’re a high earner, you may be able to bring your taxable income down by putting more money into your pension.
Benefits of this include:
- Bringing your income down below the additional rate income tax band (45%), which starts at £150,000
- Helping you keep your personal allowance, which is slowly withdrawn once you earn over £100,000
- Helping you keep your child benefit, which is gradually withdrawn if one parent in the household earns more than £50,000.
Benefit from spousal exemptions
Couples who are married or in a civil partnership can benefit from rules around the gifting of assets.
For example, you don’t normally pay CGT on gifts to a spouse, so you may be able to pass across assets standing at a capital gain, which can subsequently be sold by the receiving spouse to make sure that you are both using your £12,300 annual allowance (totalling £24,600 per couple).
You might also be able to decrease the income tax that you pay as a couple. For example, if one spouse is a non-taxpayer, and the other is a basic rate taxpayer, the non-taxpayer can give £1,260 (10%) of their personal allowance to their spouse in the current tax year.
This means the basic rate taxpayer could earn £13,830 before they start paying tax, rather than £12,570.
Remember that the specific tax-saving opportunities that are available to you will vary based on your precise circumstances. To find out what reliefs and allowances might benefit you most, speak to an investment manager or financial planner, sooner rather than later.
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