What advisers need to know about tax planning in 2023-24 and beyond

Combined with the cost of living crisis and volatile markets, it is essential to take stock of the complexities and the opportunities the UK tax system affords.

As plenty has been written about pension allowances and taxation, this article will be a high-level canter through some of the more well-known, and some of the less well-known, joys of personal taxation within the UK tax system.

So, what does the UK tax landscape look like? Well, we know that in the UK income is taxed more than capital, therefore setting the right tax strategy could reap dividends (pun intended).

We know that the sanctity of marriage and civil partnerships are favoured by tax legislation.

We know there are concerns about evasion and avoidance – the obvious difference between the two being that evasion is illegal and avoidance legal. An Isa, for example, is simply a statute approved tax-avoidance savings vehicle. 

Being aware of legislation, using tried and tested planning techniques and utilising those all-important allowances, exemptions and reliefs are the key to maximising tax-related opportunities.

Allowances and exemptions

Let’s start with a few of the more well-known allowances available to us and how they are assessed against income, capital, or both.

If added together the current allowances, and one exemption, total £49,010 this tax year. In the 2020-21 tax year the total figure was £55,570 – so we have seen a 13 per cent reduction.

Why? The freezing of tax bands and the reduction of the capital gains tax allowance and dividend allowance all play their part.

Let’s take a closer look each of these categories.

The personal allowance

• Dictates the amount of income you can earn before you must pay tax.
• Standard personal allowance for 2023-24: £12,570 (can be higher if you claim marriage allowance or blind person’s allowance).
• Frozen until 2027-28 (effectively reducing the real value of the personal allowance back to the 2013/14 level).

Marriage allowance

• Claimed if you are in a marriage or civil partnership.
• A partner earning less than the standard personal allowance can transfer £1,260 of their personal allowance to a basic rate-paying partner, saving them £252 in tax.
• Can be back-dated up to four years, resulting in tax savings totalling £1,256.

Trading and property allowances

• Up to £1,000 each tax year in respect of trading and property income.
• If you have both types of income, you can double-up and get a £1,000 allowance for each.
• Aimed at the 'casual' trader, being useful for sole traders, the self-employed and 'the sharing economy' – AirBnB, eBay etc.
• If you earn less than £1,000, from one or more trades, it can be tax-exempt. You may not need to report these earnings to HMRC or pay national insurance on the income.
• Note, if your expenses are more than your income it may be beneficial to claim expenses instead of the allowances.

Personal savings allowance

• Allows savings of up to £1,000 a year in tax-free interest.
• Basic rate taxpayers get £1,000, higher-rate taxpayers £500 and additional rate taxpayers do not benefit.
• Includes interest received from bank and building society accounts, credit unions, National Savings and Investments, purchased annuities, collective investments, government and company bonds.

Lower earners can earn up to £18,570 a year tax-free when combined with the £5,000 starting rate for savings: £12,570 + £5,000 + £1,000 = £18,570.

Isas should be maxed out as any interest received does not count towards the personal savings allowance.

Starting rate for savings

• A separate savings-related allowance (in addition to personal allowance and the personal savings allowance).
• Allows up to £5,000 in savings interest completely tax-free.
• Every £1 of other income earned above the personal allowance (£12,570) reduces the starting rate for savings by £1.

If you have non-savings income of £13,570 a year, you can earn a further £5,000 in interest and pay no tax (£4,000 from the starting rate for savings and £1,000 from the personal savings allowance).

Capital gains tax allowance

• A tax on the profit from disposing of an asset that has increased in value.
• A steady reduction in CGT was announced in 2022, as shown below.
• CGT rates of tax are still lower than income tax rates, especially for additional rate taxpayers.

To counter the effect of the lower CGT allowance, there are many actions we can undertake, for example:                                                                                

• Utilise losses from previous years to counter the lower allowances.
• Maximise Isa and pension contributions.
• Use spouse/civil partner’s allowance. 
• Bed & Isa /pension. Assuming realising a gain, or loss, is acceptable. 
• Bed & spouse/civil partner. Again, assuming realising a gain, or loss, is acceptable.
• Bed & trust. By ‘passing over’ capital gains by way of a gift into a discretionary trust, trustees can claim holdover relief. Note: trustees' CGT rates are higher than those of individuals and trustees receive half the individual exemption.
• Defer CGT by investing gains in an EIS.

Dividend allowance

• For distribution of profits by a corporation to its shareholders.
• Dividend allowance was also reduced alongside CGT, starting in 2022-23.
• This tax year individuals can receive up to £1,000 of dividend income tax-free (to reduce further in the 2024-25 tax year to £500).

Dividend rates of taxation are still less than those for income tax. 

The personal savings allowance, starting rate band for savings and the dividend allowance all form part of an individual’s basic or higher-rate tax bands.

They are not in addition to these bands and can potentially push other income into higher rate brackets.

This reinforces the need to disclose all forms of income to HMRC even if the income received is within these allowances.

Mind the tax traps

As income increases above certain thresholds, allowances are lost and create tax traps, which increase the effective rate of tax an individual pays.

As well as the loss of the starting rate for savings, at £17,570, and the halving or loss of the personal savings allowance for higher-rate and additional-rate taxpayers, there are also the following traps to be considered:

1. Marriage allowance: lost if recipient becomes a higher rate taxpayer.

2. High income child benefit: lost at £60,000 income. The benefit is reduced by 1 per cent per £100 if one parent earns in excess of £50,000. Where income is greater than £60,000 a 100 per cent charge applies, cancelling out the benefit completely.

In this situation, some people choose not to apply for child benefit. However, by claiming, even if not taking any payments, the recipient will receive national insurance credits to protect state pension entitlement.

In his 2024 Spring Budget, chancellor Jeremy Hunt announced "immediate support for working families" would be given by increasing the threshold to £60,000 effectively halving the rate at which child benefit is repaid, and that the child benefit taper would be increased from £60,000 to £80,000.

He also announced a consultation to investigate whether to assess child benefit eligibility on household income, rather than on individual income with a view to implementing by April 2026.

3. Personal allowance: lost at £125,140. For every £2 received in earnings above £100,000, £1 of personal allowance is lost. The loss of the allowance effectively adds an extra 20 per cent of tax on income between £100,000 and £125,140.

Generous benefits in kind can also trigger this trap. For example, if you run a company car or receive medical insurance, they will be taxed as if they were salary.

In addition to the above, the tapered annual allowance and university maintenance loans are examples of additional ‘traps’ to be mindful of.

Tax trap planning considerations

• Maximise use of allowances and exemptions between spouse/civil partner to remain within tax thresholds and limits.
• Transfer (savings and investments) income between spouses/civil partner to maximise tax efficiency.
• Make increased pension contributions to extend basic rate tax band and potentially gain higher rates of pension relief at source.
• Be sure to apply for child benefit to get national insurance credits for state pension and consider how the changes from next tax year will affect clients.

Taxation of collective funds

One of the most common uses of the personal savings allowance and dividend allowance is when they are assessed against returns from collective funds.

Confusion can arise over how tax is applied if income is reinvested or distributed and whether the funds are income or accumulation vehicles.

Accumulating funds produce an income, even if not received by the client. The income goes to the fund manager and they decide how to invest it. A client’s consolidated tax certificate will show the client’s share of the fund’s income.

How funds are invested affects which allowances are impacted by interest or dividends received from the underlying investments.

It is all down to the equity content of the fund. If the fund has less than a 40 per cent equity content, it will be taxed on an interest basis – cash funds, fixed interest, distribution and some multi-asset funds may fall into this category.

Against this form of income you can use the starting rate band for savings or the personal savings allowance.

If the fund has an equity content greater than 40 per cent, it will be taxed on a dividend basis and the dividend allowance can be used.

Equity funds, some managed and multi-asset funds, may fall into this category. Any interest that accrues in the fund will attract a corporate rate of 20 per cent and not be liable on the client.

To maximise the use of the various allowances (starting rate band for savings, personal savings allowance and dividend allowance), it may be worth considering individual funds as opposed to a multi-asset arrangement, or apportioning investments between married couples and civil partners accordingly.

Additionally, for clients that have fully used their allowances, funds taxed on a dividend basis can be more tax efficient, in that dividends are taxed at a lower rate than income.

Using all available pension and Isa allowances where possible will maximise tax efficiency.

Maximising allowances and exemptions

Maximising all these allowances and exemptions can provide up to £27,430 of tax-free income this tax year, subject to HMRC approval and personal circumstances.

In the below example, if we assume a 3 per cent yield net of charges, you can see the amount of capital required to provide the figure quoted above. Very useful for clients in retirement.

This is the equivalent to a circa £34,420 a year gross salary in most of the UK (Scotland will be slightly higher). 

Summary

Using all the reliefs, exemptions and allowances at our disposal will help negate the overall tax burden.

As a reminder, if you are married, or in a civil partnership, utilising both partner’s allowances and exemptions is a good place to start.

Sheltering investments in appropriate tax wrappers to maximise tax efficiency as well as making increased contributions to pensions to help avoid tax traps is another suitable step.

Neale Smith is investment platform and technical specialist at Scottish Widows