7 routes to last minute tax savings

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7 routes to last minute tax savings
(Steve Buissinne, Pixabay)

With taxes at a 70-year high and frozen thresholds pushing more and more people into higher tax bands, making the most of allowances has never been more important.

According to HM Revenue & Customs, 301,000 more people could become additional rate taxpayers by 2027/28, while many more who remain within their tax bands will pay more income tax and national insurance due to frozen allowances.

Most of the income tax allowance and rates have been frozen at their current levels until 2028, after chancellor Jeremy Hunt extended the freeze in his Autumn Statement in November.

In addition, 235,000 more people could be forced to report their capital gains after the annual capital gains tax exemption is reduced by £6,300 this April.

Anthony Whatling, tax partner at wealth manager Evelyn Partners, said this was one of the most decisive tax-year ends in decades, meaning it's time for savers and investors to review their tax position.

"Many allowances are calculated on a yearly basis, so a pre year-end review can help to identify any potential tax savings, with the changes afoot.

"Even if it’s too late to take some steps by the end of this tax year, tax planning is a year-round exercise, and it pays to look well ahead."

Whatling has pointed to seven areas that could prove fruitful when it comes to last minute tax savings:

1. Reducing taxable income and the 60 per cent trap 

The highest rate of tax is 45 per cent, applying to individuals with a total income of more than £150,000.

Personal allowances are tapered for individuals with incomes between £100,000 and £125,140 (2022/23), giving an effective tax rate in this band of 60 per cent. 

Whatling says earners can help reduce taxable income in a number of ways:

  • making pension contributions or charitable gift aid payments; 
  • transferring income-generating assets between spouses/civil partners;
  • using tax-free investments and/or tax efficient investments; 
  • investing in assets which generate capital growth rather than income; and 
  • altering the timing of income to maximise use of lower rate bands. 

From April 2023, the additional rate threshold will be reduced to £125,140, meaning that anything over the effective 60 per cent rate band will be taxed at 45 per cent.

This provides an additional incentive for some taxpayers to move income to the current tax year, although it will also accelerate the resulting tax payment.

In Scotland, where income tax will rise 1 per cent in the higher and additional rate bands in 2023/24, this becomes more significant. 

2. Pension contributions – using the annual allowance 

Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at a person's highest marginal rate of income tax.

This benefit is accentuated in payroll systems that also afford relief against national insurance contributions, for instance salary sacrifice, says Whatling.

Tax relief is restricted to the lower of a person's annual allowance (typically £40,000) and what is known as their net relevant earnings.

Earners may also be able to take advantage of any unused annual allowance from the previous three tax years to make additional pension contributions under the “carry forward” rules.  

"This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so advice can often be useful," says Whatling.

"There is a risk of future changes to this reasonably generous relief, meaning it is worthwhile considering taking full advantage of the current allowances now."

3. Giving to charity

Tax payers at the 40 per cent rate or higher may benefit from tax relief on gift aid donations they make to charity.

Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief. 

Individuals can also gift quoted shares or an interest in land to a charity.

"This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from capital gains tax," says Whatling.

4. Tax on savings income – sharing with a spouse 

Some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and £2,000 for dividend income in 2022/23.

Savings and dividend income falling within these bands is taxed at 0 per cent.

Separate to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers.  

Whatling says: "Spouses and civil partners should review who holds any savings that generate taxable income to ensure these allowances and rate bands are utilised efficiently.

"You should be aware though that the dividend allowance will halve from April 2023 to £1,000 and then halve again to £500 from April 2024."

5. Making use of tax-free or tax-efficient investments 

There are various tax-free and tax-efficient investments available.

For instance, savers can consider making tax-free investments through Isas or National Savings.

The annual ISA subscription limit for 2022/23 is £20,000, and this limit cannot be carried forward if not used. There are also Junior Isas for children under 18 (2022/23 limit £9,000).

Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As Isa income is not taxable, this allows people to give cash to their children without having to pay tax on the income generated, Whatling says.

Enterprise Investment Scheme, Seed Enterprise Investment Scheme, and Venture Capital Trust investments may provide tax relief and the opportunity to defer capital gains.

But Whatling says: "These investments are considered high risk, and there is a risk of further changes to the schemes, potentially even at the 15 March 2023 Budget."

6. Capital gains tax – it’s all about the timing 

As capital gains tax is charged when an asset is sold, people have some control over when to pay it.

"If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is £12,300 in 2022/23," says Whatling. 

"Crystallising unrealised losses to offset gains may also be an option. You can consider selling an asset which stands at a loss, or making a ‘negligible value’ claim on assets that currently have no value.

"Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses."

The capital gains tax annual exempt amount will more than halve to £6,000 from April 2023 and will then halve again to £3,000 from April 2024, making planning around this more difficult in future.

7. Inheritance tax – making use of reliefs

Gifts people make to other individuals are generally not subject to IHT unless the donor dies within seven years.

There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if the person dies within seven years.

Whatling says: "This £3,000 annual allowance can only be brought forward for one tax year, so if you have assets to spare you may want to consider using up this and last year’s allowance before 5 April."

The current year’s allowance is automatically used first. It is per donor, not per recipient, so a married couple can make gifts independently, he adds.

Rate bands and allowances for IHT are currently frozen. "There is a risk that the Spring Budget on 15 March 2023 will bring further changes to IHT, so you may wish to consider making good use of the current allowances where possible," says Whatling.

carmen.reichman@ft.com