End of tax year planning – have you utilised all your allowances? Act now
End of year tax planning is an important element of both an individual and a business’s tax strategy to ensure that all tax reliefs and allowances available have been utilised in the current tax year. It is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.
With the new tax year starting on 6 April 2023, it is important to take action now action to allow adequate time before the end of the tax year to implement any changes following a review.
With inflation currently remaining above 10% and the Bank of England base rate at 4%, this is placing additional pressure on both businesses and individuals. This makes it more important than ever to undertake a detailed review to identify any tax savings in the current year and plan for the year ahead.
There are several significant tax changes being implemented from April 2023, which may significantly affect you. These are discussed below, but in summary, these include:
|Capital Gains Tax|| |
The Annual Exemption Allowance for Capital Gains Tax, reduces from £12,300 to £6,000 from 6 April 2023
|Dividends Tax|| |
The annual dividend allowance halves from £2,000 to £1,000 from 6 April 2023
|Research and Development Tax Credits|| |
From April 2023, R&D tax rates are changing, this will benefit larger companies, but may disadvantage smaller companies.
|Income Tax Additional Rate Threshold|| |
The additional rate income tax threshold will be lowered from £150,000 to £125,140 for the 2022/23 tax year
If you require advice or guidance on end of year tax planning as we reach the end of the tax year or indeed for the year ahead, please do not hesitate to contact our specialist tax team. We can provide a comprehensive review, tailored to individual needs and circumstances.
The summary below outlines some of the tax issues that you should now be considering, to ensure you utilise the maximum tax savings as possible and all reliefs and allowances available are being fully utilised:
End of year tax planning – personal tax
Income Tax and National Insurance
The personal allowance for income tax this year is £12,570, which cannot be carried forward, so it is important to try and use this. It remains at this amount for the following tax year also.
There may be a benefit of ensuring a salary is paid of at least the lower earnings limit National Insurance threshold of £6,240, to ensure that credit is obtained for the years contributions towards the state retirement pension. Furthermore, drawing a salary of up to £9,568 can maximise the use of personal allowances and reduce corporation tax, without payment of class 1 National Insurance contributions.
Dividends – A straight-forward point to consider is whether you have made full use of the current tax-free dividend allowance of £2,000. This is available to everyone and not restricted by earnings, so if you are an owner-manager with profits available to distribute, taking a £2,000 dividend is a no brainer. If you have not yet taken advantage of this in the current tax year, consideration should be given as to whether it is advantageous to pay this before 6 April 2022.
This tax free allowance will reduce from April 2023, halving to £1,000. The following year, this this due to reduce again to just £500.
Therefore, if you intend to pay a dividend greater than £1,000 in 2023/24 tax year and haven’t used the full £2,000 tax-free allowance in the current (2022/23) tax year, consideration should be made to making part of this payment early.
It may also be advantageous to pay a larger dividend, rather than a salary above £8,839, as this may raise National Insurance contributions.
Salaries – if you are considering paying a salary in the 2023/24 tax year above the thresholds mentioned above and haven’t yet, it may be prudent to consider further payments before 6 April 2023 as an alternative.
Spouses and civil partners – An individual may be able to transfer 10% of their personal allowance to their spouse or civil partner, providing they both meet certain criteria. This could reduce their tax bill by up to £250 in the tax year. An election to do this can be made up to four years after the end of the year in which it relates.
Pensions – Pensions are generally very tax-efficient, with £40,000 being able to be paid in each year if your income is less than £240,000. If your income exceeds £240,000, the amount you can put into your pension and receive relief is restricted. Any unused amounts can be carried forward and used in the following three years.
The lifetime allowance remains at £1,073,100.
Additional tax threshold reduces to £125,000 – The level at which individuals pay the additional rate of income tax (45p) is being reduced from £150,000 to £125,000. Where this may take you in this additional tax threshold, it will be worth considering what options are available to become more tax efficient if this is an option.
Gifts of up to £3,000 a year can be made without any implications for inheritance tax, and this can be carried forward for one year.
Tax-efficient investments and end of year tax planning
ISAs are a tax-efficient way to save for higher rate taxpayers. The maximum allowance is £20,000.
der investing in Enterprise Investment Schemes and Seed EIS Shares. Tax relief is available when you subscribe to shares which meet the qualifying criteria for each scheme. Under the EIS scheme, tax liability for the year may be reduced by up to 30% of the amount invested. It also has the benefit that capital gains form disposals can be reinvested into the scheme, allowing a deferral of the gain.
Capital Gains Tax
The 2022/23 annual allowance is £12,300, which cannot be carried forward and is being significantly reduced in the 2023/24 tax year. It is always worth checking if this has been utilised correctly if you have disposed of any assets, including businesses and property. If you are in the process of selling a business or property, professional tax advice should be sought, as to the most tax-efficient way of structuring a deal.
If gains are made in the year, these can be set against any losses occurred in the same year. It is therefore worth considering disposing of any assets that are standing at a loss to balance these gains.
Importantly, the annual allowance for capital gains tax is being drastically cut by more than 50% for the 2023/24 tax year. From April 2023 the annual allowance for capital gains tax will be £6,000. Furthermore, from April 2024, this will be halved to £3,000 for the following tax year.
Private Residential Relief and Lettings Relief were considerably reduced in April 2020. Notwithstanding this, it is important to make sure, where eligible, that you take full advantage of these reliefs.
Private Residence Relief (PRR) currently allows an additional grace period of the last nine months of ownership. Lettings Relief is now limited and is available if you share your home with a tenant or have moved into care. If your property has increased in value since purchase, this can still have a significant impact on your capital gains tax bill.
With the confirmed changes to Capital Gains Tax, and the potential for further changes. it is important to seek advice should you have disposed of property in the current tax year or are expected to do so in the future.
Stamp Duty Land Tax
Since 6 April 2019, non-residents have been liable for capital gains tax on gains made on property and land in the UK.
From 1 April 2021 non-UK residents incur a 2% Stamp Duty Land Tax surcharge on purchases of residential property
Stamp Duty rates have regularly changed over the past few years, including part of the 2021/22 tax year when a Stamp Duty Land Tax holiday applied to residential property (with the nil rate increased to £500k). A tapering rate, reducing the nil rate to £300,000 also applied until 30 September 2021.
Because SDLT rates often vary, it would be prudent to check that the correct rate has been applied to any transactions. (Currently, and for the 23/24 tax year, for first time buyers, no SDLT is payable on the first £425,000 of any residential transaction).
Additional end of year tax planning considerations for businesses
Annual Investment Allowances
The Annual Investment Allowance was increased in Budget 2018 from £200,000 to £1m from January 2019. Currently, up to £1m of qualifying expenditure is available for 100% relief in the year it was incurred.
Following a further extension, this higher limit is due to expire on 31 March 2023. It is, therefore, crucial to ensure you take full advantage of this substantially higher rate.
It is always important to review expenditure, which may qualify for Capital Allowances Relief. Alongside plant and machinery, this includes research and development (see below), patents, specific intellectual property and buildings and renovating business premises in specific areas, amongst other items.
There are strict deadlines for claiming capital allowances. Capital Allowances can offer very generous tax allowances of up to 100%, which can result in significant tax savings and these should be considered carefully.
Many businesses miss out on this generous type of relief as they incorrectly believe that they are not eligible to receive it. It is always worth taking advice to review your specific circumstances, to ascertain if you are eligible to claim.
A common misconception is that R&D tax relief only applies to science and technology companies, or those with specialist research and development departments. In fact, all industries can reap the benefits from R&D Tax Relief, providing the project either seek to advance their knowledge, improve a service or product or solve uncertainties in a process.
It is important to review this before the tax year-end as deadlines will apply, dependent upon when the work was completed.
Changes from April 2023 increase the rate of tax credit available for companies undertaking qualifying R&D and claim RDEC. Largely aimed at larger companies, RDEC can also be claimed by SMEs in certain circumstances.
RDEC is a separate credit, brought into account as a taxable receipt when calculating trading profits. The existing general rate (as of February 2023) is set at 13% of the qualifying R&D expenditure. The changes being introduced in April 2023 increases this rate from to 20%, which is obviously a significant increase and will benefit all companies claiming this relief.
The changes reduce the rates of R&D tax relief available for SMEs, reducing the SME additional deduction rate from 130% to 86%. Furthermore, the rate of the SME payable credit rate which can be claimed for surrenderable losses is to be decreased to 10% (from 14.5%). This is still a substantial amount and any SMEs not already claiming R&D tax credit, should check their eligibility. Further information is available here.
Where applicable, our R&D tax team will be able to advice you and agree a strategy to help you claim R&D tax credit. More information on how we can help you with R&D tax credit can be found here.
Super-deduction tax relief
Super-deduction was one of the most useful tax changes for many businesses to be introduced in 2021.
130% capital allowances can be claimed by companies from 1 April 2021, until the end of March 2023, on qualifying plant and machinery investments.
This means that for every pound a company invests, their taxes can be cut by up to 24.7 pence.
Given that this generous tax relief is at the time of writing, ending on 31 March 2023, it would be prudent to take advice now on how to maximise this relief on any expenditure undertaken or planned. This includes exploring the tax benefits of bringing any planned expenditure beyond March 2023 forward to utilise this relief. Please contact us for further advice.
IR35 roll out to the private sector
On 6 April 2021, changes came into effect regarding off-payroll working for intermediaries and contractors. These were originally due be implemented in 2020 but were delayed due to Covid-19.
Kwasi Kwarteng, the then Chancellor proposed to reverse much of the changes to IR35 in the mini budget of 2022, however these were overturned by his successor, Jeremy Hunt and these now stand.
In a nutshell, many private companies that employ contractors are now liable to pay their tax and national insurance contributions if IR35 applies to their circumstances.
IR35 rules are complex and if organisations get them wrong, they risk taking on their contractors’ tax liability, which can be significant, in addition to fines.
As of 6 April 2021, all medium or large-sized private sector clients (as well as all public sector clients) are responsible for deciding their worker’s employment status. This includes some charities and third sector organisations.
If IR35 off-payroll working rules apply, your worker’s fees will be subject to tax and National Insurance contributions. If these are not paid, it will be yourself that remains liable for these charges, not the contractor.
It is important that anyone using contractors or intermediaries is familiar with these rules and has carried out an assessment to determine their workers status. Further information on this can be found here. For assistance on this matter, please contact us.
End of year tax planning for Property Investment Businesses
For residential buy-to-let investors, since April 2020, mortgage interest is only eligible for income tax relief at the basic rate of 20%, regardless of tax bracket.
This may have resulted in increased taxable income, increasing certain thresholds, which could reduce eligibility for child benefit, personal allowance or pension savings annual allowance, and push some taxpayers into a higher tax band.
For these reasons, it may benefit to consider the merits of setting up a limited company for buy-to-let properties that you hold personally. More information on this can be found here.
Corporation Tax is increasing on 1 April 2023 to 25%. This was another U-turn that was announced in the 2022 Autumn Budget by Jeremy Hunt.
It is important to check that this has been included in cash-flow calculations for the year ahead and to consider the impact this increase will have on your business.
End of year tax planning – Other items to consider
The tax year-end also provides an opportunity to review your business activities, and to look at ways to be more tax efficient. Other items to consider include:
Accounting dates – is your own year-end date at the most useful point in the year for your company? Would it be advantageous to align this with a key date in your business calendar?
Incorporation – If you trade as a sole trader, a partnership or an LLP, it is a good point in the year to review your circumstances to ascertain if it would be more tax-efficient to incorporate as a limited company.