How to minimise your tax bill

With the 2022/2023 tax year coming to a close on 5th April, there is limited time to be able to maximise your tax efficiency and minimise your tax bill, both now and in the future, by using this year’s allowances. But in this article, we will look at some ways you can take advantage of any tax breaks in the remainder of the 2022/2023 tax year before looking ahead to the 2023/2024 tax year and the upcoming changes to tax legislation. However, be aware that the income tax rates as detailed in this article apply to England. The nations in the UK have different income tax bands.

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The simplest way to maximise tax efficiency in the current tax year is to make full use of your annual Individual Savings Account (ISA) allowance. Each tax year you can contribute up to £20,000 per person into an ISA wrapper; the main two types of ISAs are Stocks & Shares ISAs (S&S ISA) and Cash ISAs, however there are also Lifetime ISAs and Innovative Finance ISAs. The taxation benefits of ISAs are that any interest payments, if it is a Cash ISA, or capital growth or income/dividend payments, if it is a S&S ISA, are tax free.

Another way to increase tax efficiency in the current tax year is to make a pension contribution. The main advantage of this is tax relief, where everyone gets a 20% uplift from HMRC, to their net contribution (subject to contribution limits). In addition to this, if you are a higher or additional rate taxpayer you can also claim a further 20% or 25% tax back in your self-assessment tax return. Pension contributions can also give effective tax relief of 60% to some, by allowing them to reclaim their personal income tax allowance (which tapers away when income exceeds £100,000) and they can also allow individuals to regain entitlement to child benefit. Do note, however, that higher/additional rate tax relief can only be claimed on income that has been taxed in the additional or higher rate tax brackets. For instance, if you earned £70,000 and contributed £30,000, only £19,730 would have been taxed at 40% and so higher rate tax relief could only be claimed on this amount.

Once within the pension, funds grow tax free and are outside the individual’s estate for inheritance tax purposes. When benefits are taken, 25% of the fund is available tax free (up to the Lifetime Allowance, unless there are protections in place), though please note the implications of the Lifetime Allowance and the proposed changes of this noted below.

Given these attractive tax advantages, people are limited in how much they can contribute into pensions, firstly by the higher of their UK relevant earnings (broadly speaking employment/self-employment income) or £3,600 gross, if there are little or no earnings.  Additionally, individuals are limited by the pensions annual allowance, where contributions in excess of this are subject to a tax charge which effectively removes the tax relief from the contribution.  The annual allowance is currently £40,000 (this is changing next year, see below), but it is reduced for high earners.

Importantly, you can carry forward any unused pensions annual allowances you have remaining from the previous three tax years. You must use all of the current tax year’s annual allowance before you can use previous tax years annual allowances. If you have made full use of this year’s annual allowance then it may be prudent for you to use some, or all, of any remaining 2019 / 2020 annual allowance this tax year as you will lose to access to this on 6 April 2023.

Looking forward to the new tax year

When looking forward to the 2023/2024 tax year there have been some notable changes that will affect how you can minimise your tax bill; the main ones we will cover are:

• Reduced Capital Gains Tax Allowance.
• Reduced Dividend Allowance.
• Increased Annual Allowance for pension contributions.
• Lifetime Allowance tax charge removed.

All four of these will have big impacts on financial planning and your financial future so, if you would like some more guidance on any of the topics that are explained further in this article, feel free to reach out to one of our team.

What’s changing to the Capital Gains Tax Allowance?

The Capital Gains Tax Allowance is decreasing from the current £12,300 to £6,000 in the 2023/2024 tax year; it is also due to decrease again to £3,000 in the 2024/2025 tax year. This will mean that gains made from 6th April 2023 to 5th April 2024 exceeding £6,000 will be taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. In other words, for a higher rate taxpayer, there will be a tax charge of £1,260 if you were to realise £12,300 worth of gains on 6th April 2023; if you were to do so a day earlier, so still in the 2022/2023 tax year, there would be no tax charge.  Please note property gains are taxed at a higher level, 18% and 28% for basic and higher/additional rate taxpayers respectively.

What’s changing to the Dividend Tax Allowance?

The Dividend Allowance is undergoing a similar change to the Capital Gains Tax Allowance. From 6th April 2023 people will only have a £1,000 tax free Dividend Allowance, instead of the previous £2,000. This will reduce further to £500 in the 2024/2025 tax year. The rates at which tax will be charged on dividend payments exceeding this will remain fixed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

Big changes to pensions announced

Jeremy Hunt announced in the budget on the 15th of March two large changes concerning pensions. Firstly, the annual allowance for pension contributions in the 2023/2024 tax year will now be £60,000; an increase of 50% from the current £40,000 maximum. This allows for more scope with planning in regard to pensions and the ongoing contributions made to them. 

The Chancellor also announced that from the 6th April 2023 no-one will face a Lifetime Allowance charge irrespective of the level of their pension benefits and from April 2024 the Lifetime Allowance will be abolished. The Lifetime Allowance is the limit on how much people can build up in their pension pots, before potentially being subject to a tax charge. The Lifetime Allowance is currently £1,073,100. Once again to see how this change could unwittingly affect someone following this announcement,  if they were to were to receive a lump sum from their pension that was in excess of the Lifetime Allowance in the 2022/23 tax year (so before 6th April 2023), they would be subject to a standalone 55% tax charge. If someone were to receive the same lump sum payment in the 2023/2024 tax year, they would be taxed at their individual marginal rate of income tax, which could result in a significant tax saving.

Although the lifetime allowance is set to be scrapped, the Chancellor also announced that there will be a limit to the amount of tax-free cash that can be taken. In practice, there will be no impact on the amount of tax-free cash one might have expected to receive from their pension pot, as the amount you can draw will be limited to its current level of £268,275 (which is 25% of the current lifetime allowance).

As you can see, there are still measures you can take in the current tax year to maximise your tax efficiency. But there are several changes coming in the new tax year to financial regulations and tax allowances that can both positively and negatively impact you. The further changes due in the 2024/2025 tax year show the constant shifting financial landscape, which goes to show the importance of staying up to date with changing regulations whilst understanding how best to remain as tax efficient as possible. If you feel like you would benefit from our expertise in assisting you with this, please do not hesitate to contact us.

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Please note: the FCA does not regulate cash flow planning or tax advice. This article is intended for general information and should not be taken as individual financial advice.