Reducing Your Tax Liability – the key is to think ahead

Ordinarily a large amount of tax planning is left towards the end of the tax year, but it is worth considering your position and taking steps now to get your finances in check. The last year has certainly provided plenty of challenges, which look to continue, with high inflation and interest rates it is worth taking some time to consider the tax planning opportunities that are available.

With that in mind, this checklist from Sam Mudd, Tax Manager, covers everything you need to consider before 6 April 2024 to put you and your family in the best possible position.

Key tax planning areas to consider

As well as optimising your tax planning for the current year (2023/24). Tax planning strategies are usually most effective when implemented before the tax year begins. The following are the key areas to consider.

Income tax

Personal income of between £100,001 and £125,140 is taxed at an effective rate of 60% due to the loss of the personal allowance, while income over £150,000 is taxed at 45%.

Child Benefit is tapered for incomes between £50,000-60,000 so for a taxpayer with two children who receives Child Benefit of £2,074.80 per year (2023/24 rates), the effective rate of tax is 60.75% in this income bracket, while for those with three children who receive Child Benefit of £2,901.60, the effective rate of tax is a whopping 69% for income between £50,000-60,000.

Tax planning can be particularly effective for taxpayers who find themselves in the punishing income bands set out above.

If you wish to avoid the higher rate of tax, you should consider steps to reduce your taxable income to below these levels if you can. Increasing your pension contributions might be an effective way to do that. Alternatively, you could consider:

• Transferring an income-generating asset to a spouse with lower income
• Pension contributions
• Deferring income to a later tax year, if your income is going to be lower
• Making Gift Aid payments
• Tax efficient investments such as Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT)

Other steps you can take to reduce your income tax liability include:

• Ensuring married couples / civil partners both have sufficient income to use their full personal allowance: £12,570 in 2023/24 or claim the Marriage Allowance where it is not possible to redistribute income. The Marriage Allowance could give a tax saving of up to £252 for the current year.
• Redistribute investment capital between spouses / civil partners to reduce the tax incurred on income and capital gains. No tax is payable on transfers between married couples and civil partners.

Capital Gains Tax

Most individuals have a Capital Gains Tax allowance of £6,000 for the 2023/24 tax year. Any assets that are sold at a loss can reduce gains for the year or be carried forward and set against future capital gains.

Importantly, any of the annual exemption not used cannot be carried forward and will be lost. Assets can be transferred between spouses and civil partners tax efficiently to ensure both exemptions are used fully.

From April 2024 the Capital Gains Tax allowance will be reduced further from £6,000 and to £3,000 making it even more important to utilise the higher annual exemption whilst it is available.

Annual allowance for pension contributions

Investments in your pension are free from Income Tax and Capital Gains Tax, but there is a limit to the amount you can pay in. The current standard tax-free pension allowance has increased from 6 April 2023 to £60,000 or 100% of earned income, whichever is higher. The carryforward rules allow you to make use of any annual allowances that were not used during the last three years. That makes 5 April 2024 the last opportunity to use unused allowances from 2019/20.

If your adjusted income i.e. your taxable income plus employer pension contributions, is over £260,000, your annual tax-free pension allowance falls away by £1 for every £2 of income. There is a minimum tax-free pension allowance of £10,000 for those with adjusted income of more than £312,000.

You can also pay up to £3,600 into a pension pot for your spouse, a civil partner or a child and benefit from basic rate tax relief on the contributions.

Gift Aid

Tick the box to say you are a UK resident and taxpayer when making Gift Aid payments and you’ll receive 20% or 25% of the donation as a reduction in your tax liability. To make the most of Gift Aid, the person with the highest tax rate in your family should ideally make the payment.

Tax-efficient investments

Income tax relief is available to reduce your tax liability on the following investments:

• Venture Capital Trusts (VCTs) – Investments of up to £200,000 per year qualify for income tax relief at 30%. There’s no capital gains tax payable on any profit made when selling the investment and dividends are received tax-free.
• Enterprise Investment Scheme (EIS) – Annual investments of up to £1 million in qualifying companies attract income tax relief at 30% (or up to £2 million if at least £1 million is invested in knowledge intensive companies). If the investment is held for over three years, then any capital gain is free from CGT.
• Seed Enterprise Investment Scheme (SEIS) – Investments of up to £200,000 per tax year can be made in start-up companies that qualify for the SEIS. Income tax relief is available at 50%. No CGT is payable on disposal if the investment is held for more than three years.

Both EIS and SEIS investments can be carried back to the previous tax year to obtain income tax relief in the previous tax year.

Savings and investments

• Ensure the savings income for both individuals in a married couple or civil partnership is sufficient to use their full £500 or £1,000 personal savings allowance and £1,000 dividend allowance.
• Shareholding directors of private companies can pay themselves up to £,000 of dividend income for 2023/24 tax-free. After this date the dividend income allowance will reduce to £500 for the 2024/25 tax year.
• If interest on investments or savings is due to be paid just after 5 April 2023, closing the account before the end of the tax year can bring the interest forward. That will allow you to use up any surplus personal savings allowance you have for the current tax year.

ISA allowances

You should increase your savings if necessary to make the most of the £20,000 tax-free ISA allowance per person. Married couples can invest £40,000 over the year with no Capital Gains Tax or Income Tax to pay. Any unused allowance cannot be carried forward.

Additional tax planning areas to consider

While the points we’ve covered are likely to be relevant to most people, there are also some specific tax planning areas that may apply to others:

Trading and property allowances

Two £1,000 tax-free allowances are available, one for income from property and the other from trading and miscellaneous income. They can reduce your tax liability if you generate a modest income, for example, by renting out a room on Airbnb or selling items on eBay or Amazon.

Electric cars

If you are thinking of switching to an electric car for business use, the tax benefits are well worth exploring and include enhanced capital allowances, lower benefits in kind (determined by the vehicle’s CO2 emissions and fuel type) and £0 road tax for 100% electric vehicles until 2025. You will be able to benefit from capital allowances, car benefits in kind (determined by the vehicle’s CO2 emissions and fuel type) and zero tax on fuel benefits in kind.

Your financial future is in safe hands

At Scrutton Bland, ensuring that our clients and their families get the best outcome from their efforts is part of the process of providing clear and effective advice to help you maximise your wealth and make informed tax planning decisions.

Whether you are a business owner or private individual, making informed decisions and utilising the allowances available to you can make a dramatic difference to your wealth in the long-term.

Get in touch with Sam or one of the tax team to arrange a free, confidential consultation at a time that works for you by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk