With 2022/23 tax year almost over, it’s time to review the best tax-saving strategies. This comprehensive guide will help you make the most of the end of tax year 2023, and to keep these strategies in mind to enter 2023/24.
(12-minute read)
We will cover:
- Tax-efficient tips that cover different types of tax
- Practical steps you can take to apply them and start saving now
Table of contents:
Introduction
1. Tax-efficient investments
2. Income Tax
3. Changes to tax rates
4. Pensions
5. Property rates
6. Capital Gains Tax
7. Inheritance Tax
8. Separation and Divorce
Introduction
This article lists numerous tax tips, some of them well-known and others lesser-known.
We’ve divided these benefits into categories, so you can decide on the best option for you.
On each tax tip, you can find practical advice that outlines the best course of action.
So what are the existing tax-saving tips you can apply right now?
1. Tax-efficient investments
Individual Savings Accounts (ISAs) are a well-known tax-efficient way to save money in the UK.
The total ISA allowance for 2022/23 is £20,000 per adult, which you cannot carry over from one year to the next.
If a couple invests the full allowance each year for 25 years, they could have a £1 million pot for their retirement, providing tax-free income.
Parents can also open a Junior ISA (JISA) for their children and contribute up to £9,000 per year.
Anyone between 18 and 39 years old can open a Lifetime ISA, which allows a contribution of up to £4,000 per year, and the government gives a 25% bonus on the investment at the end of each tax year.
In terms of investment reliefs, the Enterprise Investment Scheme (EIS) offers up to 30% income tax relief on investments up to a maximum of £1m per tax year, while deferring capital gains and exempting investments from inheritance tax.
Practical advice
Grandparents can use the JISA to give annual gifts to their grandchildren to help reduce their estate for inheritance tax purposes.
EIS investments may be suitable for investors who have:
- a large income tax bill, and/or,
- a capital gain from the disposal of any other asset that they want to defer.
- high income and cannot make large pension contributions due to tapering rules applying.
2. Income tax
Income tax is a key consideration for individuals who want to reduce their tax bill.
One important factor to consider is the personal allowance.
If your taxable income is over £100,000, then your personal allowance will be reduced.
For every £2 of income above this threshold, you’ll lose £1 of your personal allowance.
When your taxable income is more than £125,140, you’ll lose all of your personal allowance.
Income between £100,001 and £125,140 is taxed at an effective rate of 60%.
Tax-saving strategies
To reduce your tax bill, consider making a pension contribution, which is subject to Annual Allowance restrictions, or making charitable donations to attract gift aid.
You should also consider making tax-efficient investments and avoid paying dividends from personal companies that will fall within this band.
Another key consideration is the Personal Savings Allowance (PSA). Since 6 April 2016, the majority of savings interest has been paid gross.
The PSA allows you to earn a certain amount of interest on your savings tax-free. If you are a basic rate taxpayer, you can earn up to £1,000 of interest tax-free.
If you are a higher rate taxpayer, you can earn up to £500 of interest tax-free.
However, additional rate taxpayers do not get any tax-free allowance.
If the interest you earn is on top of your personal allowance, you may be able to earn up to £5,000 tax-free.
This is the starting rate band.
Business owners can charge interest on loans to their companies to make use of the personal savings allowance and starting rate band.
Another way to make use of this relief is to balance interest-bearing investments like National Savings Bonds between spouses.
The current tax year allows individuals to receive up to £2,000 of dividend income without paying any tax on it.
If you have control over when to pay dividends, it is best to declare dividends before April 5, 2023, to make use of the allowance.
This allowance is especially useful for those who pay tax at higher or additional rates.
Married couples should consider reorganising their investments to utilise both spouses’ allowances.
The Chancellor announced in the Autumn Statement that the government will reduce the dividend allowance for the years 2023/24 and 2024/25 to £1,000 and £500, respectively.
If you are a shareholder in a family company, you may want to review your profit distribution strategy and consider paying interest instead of dividends whenever possible.
Practical advice
If you have no other income, you can receive a dividend of up to £14,570 (in 2022/23) without paying any tax. If you receive a dividend of up to £50,270, you won’t have to pay any higher rate tax. In private family companies, you can declare dividends in a tax year to trigger the tax point and kept on loan account in the company until the shareholder needs the funds. If you don’t use your allowances, you will lose them.
3. Changes to tax rates
In recent budgets, there have been several changes to tax rates. Here is a summary of the current situation:
Dividends
From 6 April 2022, dividend rates increased to:
Basic: 8.75%
Higher: 33.75%
Additional: 39.35%
National Insurance (NIC)
Class 1 NIC rates for employees and employers have remained at 12% and 2%, respectively, except for a brief period between April 6, 2022, and November 5, 2022.
For Class 4, the rates are:
2022/23: 9.73% / 2.73%
2023/24 and beyond: 9% / 2%
Practical advice
Consider receiving income from family businesses as interest or rent, which often has lower tax rates since no national insurance applies.
Corporation tax
Starting on April 6, 2023, the main corporation tax rate will increase to 25%. For profits between £50,000 and £250,000, the rate will effectively be 26.5%, resulting in an overall tax payment of between 19% and 25%.
Companies engaged in small trading and property investment with profits under £50,000 will still be taxed at the 19% rate.
Additional rate band
In the tax year 2022/23, individuals with income above £150,000 pay 39.35% tax on dividends and 45% tax on other types of income.
From the tax year 2023/24, these tax rates will start on income above £125,140.
If an individual’s income regularly exceeds £125,140, they should try to receive up to £24,860 of income before the end of the 2022/23 tax year to make use of their remaining higher rate band for that year.
Scotland
Taxpayers with their main residence in Scotland will pay a top tax rate of 47% on income above £125,140 for the year 2022/23. If taxpayers live between Scotland and another UK country, their tax jurisdiction depends on their main residence, which may not be the same as where they spend the most time.
4. Pensions
To optimise tax planning, individuals can leverage pensions as tax-efficient vehicles, despite changes over the years.
Most people have an annual pension allowance of £40,000 for 2022/23, which includes tax relief.
To save more for retirement, carry forward rules allow the use of unused allowances from the previous three tax years.
However, one must have been a pension scheme member during the tax year they wish to use the unused allowance from.
You can use the carry forward rules for the tax years 2019/20 to 2022/23 until 5 April 2023.
Relevant UK earnings limit personal contributions to the greater of £3,600 or 100%, excluding rental income.
Even a small contribution can qualify for the carry forward rules.
High earners with net income above £200,000 face restrictions on pension contributions, while a minimum allowance of £4,000 applies to adjusted income over £312,000.
You can make contributions to children and grandchildren up to £2,880 net (£3,600 gross) per child or grandchild.
Practical advice
It’s advisable to use any unused allowances before 5 April 2023.
Individuals about to turn 75 and whose pension savings exceed the current Lifetime Allowance of £1,073,100 should consider taking money out of their pension to bring it below the Lifetime Allowance, and it’s recommended to seek expert advice in such cases.
Pensions are not subject to inheritance tax, and if a pension scheme member dies before 75, their beneficiaries can inherit the funds tax-free.
If they die after 75, beneficiaries will be taxed on the received funds, depending on their income tax rates, which could be as low as 20% for basic rate taxpayers.
Contributions to pensions for family members like grandchildren up to £3,600 (before tax) can be considered normal spending from an individual’s income for inheritance tax purposes.
5. Property Taxes
To get tax relief on the interest you pay for a rental property loan, you must pay at the basic rate of 20%, regardless of your income tax rate.
If you pay a higher or additional rate, you may want to transfer the rental property to a spouse with a lower tax rate or incorporate the property.
However, incorporation is not simple, and you must consider factors like capital gains tax and stamp duty land tax.
If you sold a UK residential property after April 5, 2020, you must inform HMRC of the sale and pay any tax owed within 60 days of completion.
This is in addition to reporting the gain on your self-assessment return.
If you sell your primary residence, you can use Private Residence Relief to lower the amount of tax you must pay on any profit made.
In 2020, the rules for Private Residence Relief changed, and you can only claim relief for the last nine months before selling your home, and lettings relief is now very restricted.
Note that Furnished Holiday Lettings do not face interest restrictions.
Practical advice
Consider transferring rental property to a spouse with a lower tax rate or incorporating it if you pay higher tax. Furnished Holiday Lettings have no interest restrictions, but strict criteria must be met.
6. Capital Gains Tax (CGT)
Review your investment portfolio and sell assets that have increased in value to make use of the £12,300 CGT exemption before the tax year end.
The exemption can’t be carried forward, and it will be reduced to £6,000 in 2023/24 and only £3,000 in 2024/25.
Married couples can transfer assets between partners to take advantage of two CGT exemptions.
To offset any capital gains, sell assets that have decreased in value, but keep in mind the 30-day repurchase rule.
Practical advice
Consider ‘bed and spouse’, ‘bed and SIPP’, or ‘bed and ISA’ to repurchase shares.
Investors can benefit from Investors’ Relief for investments in unlisted trading companies.
A 10% CGT rate applies to shares held for at least three years, and other conditions apply.
7. Inheritance tax (IHT)
Couples with children and a family home can receive up to a £1 million allowance for their estate, while those without children are limited to £650,000.
Income that is not spent annually accumulates in the estate and may be subject to 40% Inheritance Tax (IHT) upon death.
Gifts made more than seven years before death are not subject to IHT, and the tax gradually decreases if the giver does not die within three years of the gift.
Gifts are charged based on their value at the time given, and any increase in value is not subject to IHT.
Annual gifts up to £3,000 and smaller gifts of £250 per year to any number of people are also free from IHT.
A special occasion gift of up to £5,000 for a child’s wedding is also exempt.
Regular gifts from surplus income are an easy way to decrease the estate’s value without incurring IHT.
The “residence nil rate band” offers an extra tax-free allowance of £175,000 per person when a UK residential property is inherited by a linear descendant after death.
This allows up to £1 million worth of assets to be inherited without IHT in certain situations.
Trusts are a popular method of transferring wealth that can be set up every seven years without paying IHT.
Family Investment Companies offer a tax-efficient investment option for long-term family-focused investment.
Finally, having a current will is essential to provide flexibility and protection for family needs.
If you recently married, your previous will is automatically revoked.
Practical advice
Setting up new trusts every seven years can be an easy way to reduce the amount of Inheritance Tax.
8. Separation and Divorce
In divorce cases, one of the most important tax considerations is Capital Gains Tax (CGT).
If you transfer assets between spouses who are living together at some point during the same tax year, no CGT will be payable as it is a no-gain / no-loss situation.
This rule applies to tax years up to and including the year of permanent separation.
After the year of separation, the connected party rules apply until the Decree Absolute is granted.
In this case, transactions are treated as if they happen at the current market value.
Changes made to CGT rules
However, from April 6, 2023, changes will be made to CGT and divorce rules that may affect transfer decisions.
If a transfer occurs after the year of separation, there may be unwanted CGT issues.
If assets are transferred to a separated spouse before the Decree Absolute, and a capital loss occurs, it is called a “clogged loss” for CGT purposes.
These losses can only be used to offset capital gains arising from transfers to the recipient spouse before the Decree Absolute.
When a couple divorces or separates, they can only have one main residence between them, which may cause issues.
If the property has been their main residence for the entire time they have owned it, it must be sold within nine months of one of the parties moving out to receive full Private Residence Relief (PPR).
If it takes longer than nine months, part of the gain will be taxable, resulting in CGT.
However, if the spouse who moved out sells the property to the spouse who remains, they can use a specific PPR relief extension for divorce and avoid CGT.
Changes to the rules from April 6, 2023, state that transfers of assets between separated couples without CGT will last for three years, and longer if the transfer happens as part of a formal divorce agreement.
If one spouse retains an interest in the former matrimonial home after separation, they can claim PPR when they sell it.
PPR relief can also apply to the final sale if one party has transferred their interest in the former matrimonial home to their ex and is entitled to receive a percentage of the proceeds.
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