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Your Year End Tax Planning Checklist: Individuals

Your Year End Tax Planning Checklist: Individuals

Your Year End Tax Planning Checklist: Individuals

Wednesday 7 February, 2024

Do you worry about your tax bill towards the end of the Tax Year?

Whether you're a business owner, an individual, or both, it would be very wise to set some time aside to review your personal and business tax planning. A review can help you understand what opportunities, if any, may be available to you, your business and your family.  

In this article we look at personal tax planning opportunities and next week we will explore tax planning for businesses.

Speak to a local tax planning expert in St Albans

Please remember that the UK tax code system is enormous and also very complicated. So, engaging accountants and tax advisers is recommended. This being the case, why not pay a visit to your local  Accountants in St Albans, Visionary Accountants, to help you make sense of it all.

When does the tax year end?

In the UK, the tax year / fiscal year begins on 6 April and ends on 5 April of the following year. It doesn't follow the calendar year due to historical, religious and agricultural reasons. The reason for this is the Spring Equinox, and the shift from the Julian calendar to the current Gregorian version.

Year end tax planning checklist for individuals

1. Income tax (avoiding the 60% effective rate)

The tax-free personal allowance (the amount of income you can earn before being subject to tax) for the 2023/24 tax year is £12,570. It, along with the tax rates, will remain frozen at this level until 5 April 2028 across the UK.

For UK tax payers (excluding Scottish tax payers) the basic-rate is frozen at £37,700. The starting point at which you would pay the higher-rate is £50,270.

The additional-rate threshold is £125,140 and you need to understand that the personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This is known as 'adjusted net income' and means if you're earnings are in excess of £125,140, then you don't benefit from the personal allowance.

Unfortunately, this also means that your effective tax rate (the average) on your income in the £100,000 - £125,140 range can be up to 60%!

Thankfully there are ways you can avoid this issue, either through pension contributions, gift aid on charitable donations, or both.

The government encourages saving for retirement through tax relief on pension contributions. This means you can use these contributions and donations to plan and potentially reduce your taxable income so that it doesn't breach £100,000 and incur the 60% effective rate of tax. 

If you're in business with your spouse then you could look at the profit sharing arrangements. Alternatively if self-employed, and your spouse works in the business, you could increase their wages, assuming that is commercially viable and reflective of the work being undertaken.

2. Basis period reform for the self-employed

For 2024/25 the basis period of assessment for taxable profits will change to the tax year. This means the 2023/24 tax year is the transitional year to basis period reform. When reporting your earnings, you'll have to understand that these now have to be calculated for the tax year in question, namely 2023/24, rather than for your accounting year. 

If your accounting year doesn't match the tax year then this could have the impact of accelerating your profits into an earlier tax year. That in turn will increase the amount you owe HMRC in the transition year. 

Profits in this transition period are governed by transitional rules. These specify that you may, depending on your circumstances, be able to split the additional tax due over a 5 year period. Things to consider in relation to all this include:

  • Changing your accounting year end date to match the tax year
  • Projecting your cash flow off the back of the changes
  • Consider how this impacts your funding requirements
  • Calculate the relief you can potentially obtain through your overlap profits

Changing your accounting year is complex, and we certainly recommend a meeting with your local accountant to talk through the tax implications. To learn how to avoid, what could turn out to be, a large and surprise tax bill, call your local Accountant in St Albans on 01727 730550.

3. National Insurance

If you're employed, then starting from 6 January 2024, the main rate of Class 1 Primary National Insurance Contributions (NICs) will be reduced from 12% to 10%. This could result in an annual NIC saving of £450 for the average worker earning £35,400. Consider if earnings can be deferred into the following tax year to potentially achieve savings. 

If you're self-employed then Class 2 NICs are being abolished, potentially saving you up to £182 per year. If you are self-employed and your profits are below £6,725 or if you pay voluntary class 2 NIC, you will still have the option to continue doing so.

4. Make use of the marriage tax allowance

If you're a married couple, or in a civil partnership, check if you qualify for the marriage allowance. It could save you £252 per year in tax. Furthermore, you could back-date your claim by up to 4 years, if you haven't made use of the allowance in that time frame, potentially saving you up £1,008.

According to HMRC, more than 2m couples could be missing out, and 4.2m can gain from the allowance. It applies where one partner earns below the income tax personal allowance of £12,570, and the other partner pays basic-rate income tax. You have to be married, or in a civil partnership, if you're cohabiting then you won't be eligible. 

It works whereby one of you can transfer £1,260 of your personal allowance to your spouse, or civil partner, if they're earning more. There are certain qualifying conditions in order to be able to make this election, one of which is that you cannot be a higher, or additional rate tax payer. 

One partner may pay more tax than the other, but as a couple, you'll likely pay less. Plus, once you've applied, you automatically get the tax break every year, until you choose to withdraw it. How much you save depends on how much you earn, so be sure to use the government's marriage allowance calculator to work this out.

5. High Income Child Benefit Charge

If you, or your partner, receive Child Benefit payments from the state, and you have income greater than £50,000, then the High Income Child Benefit Charge (HIBC) kicks in. The term 'partner' refers to spouse, civil partner, and can include someone you live with as if you're married.

HIBC takes back Child Benefit payments at a rate of 1% for every £100 of income over £50,000 up to £60,000. Once income reaches £60,000, and above, you lose all Child Benefit payments. An option above this range is to stop payments, however, it may be advisable to continue them to maintain eligibility for the State Pension. 

If your income is above £50,000 then it's your responsibility to notify HMRC, and declare this in a tax return, so that some of the benefit payment can be recouped. If you, and your partner, are both above the threshold, then it is the responsibility of whoever has the higher income to notify HMRC.

Where applicable, consider how income can be distributed, and assets held, between you and your spouse. It's feasible that this could result in avoiding the charge dependent on your combined level of earnings.

To learn more, read our in-depth article here: Child Benefit - to claim or not to claim?

6. Retaining tax-free childcare

The tax-free childcare scheme offers you up to £2,000 towards your childcare costs per year. The scheme can be used to help you pay for up to £10,000 of childcare per child each year, or £4,000 in cases of disability. This sum can go towards childminders, nurseries, childcare costs and potentially even some holiday camps, and the scheme is open to all workers including self-employed.

Eligibility for tax-free childcare is lost when one parent’s income is above £100,000. Pension and gift aid contributions are, however, deductible in calculating the £100,000 income figure. Following such a strategy could therefore result potentially in tax free childcare being retained.

The scheme runs until the September after your child turns 11, or age 16 if they're disabled, so it's definitely something to consider if you are below the £100,000 threshold.

7. Dividends and timing

For the 2023/24 tax year you can withdraw £1,000 worth of dividends from your limited company without being subject to taxation. Known as the dividend allowance, this is set to fall to £500 pa from 6 April 2024. If you don't make use of it, then the allowance can't be carried over to the next tax year meaning you lose it. So, where feasible, be sure to maximise your allowance.

Understanding dividends and dividend allowances can be complex. Avoid potential misinformation by consulting with a qualified local accountant. They can provide tailored advice to maximise tax relief for both business owners and shareholders. 

8. Capital Gains Tax and use of allowances

If you've sold a capital asset, or assets, for profit then you currently benefit from an allowance of £6,000 called the Annual Exempt Amount (AEA). Above this the Capital Gains Tax (CGT) rate you're charged depends on the asset you've sold and your tax band. As with the dividend point above, your CGT allowance can't be carried forward meaning it makes sense to make use of it for your gains every year.

You need to consider your assets and investments carefully every year. This is with a view to ascertaining if actions, and disposals today, would work best for you by making use of existing tax rates, and reliefs. This is especially so given the CGT annual allowance is set to reduce in the 2024/25 tax year to £3,000.

This highlights the need for careful planning to make best use of the annual exemption and could include the transfer of assets between you and your spouse, for example. It is wise to seek professional advice in order to get the detail correct on such disposal matters.

If you consider the tax bands and rates, if one spouse is a higher rate taxpayer, and the other hasn't used their basic rate band to its entirety, then assets could potentially be transferred. This means you could then access the 10% basic-rate (if the asset is not a residential property), rather than being subject to the 20% higher/additional-rate.

Where you've sold a residential property, remember that the gains must be reported and paid to HMRC within 60 days of the sale. If you own more than 1 home, you may need to consider electing one of them as a principal private residence (PPR). Any gains on the sale of your PPR are usually exempt from CGT. Remember, you have 2 years in which to make an election.

If you are separating, or are in the process of divorce, then there will likely be the consideration of the transfer of assets. For the purposes of CGT this works on a no gain/no loss basis. The legislation was updated on 6 April 2023 whereby separating couples now have up to 3 years from the end of the tax year of separation in which to transfer assets, and benefit from the nil gain, nil loss, treatment. Previously assets could only pass between separated spouses and not be subject to CGT in the year of permanent separation.

Any investment in cryptocurrencies that results in gains means CGT is likely to apply. The government don't treat crypto as money. This means you will be taxed on the realised profits when you either:

  • Trade for other cryptocurrency or;
  • Convert the cryptocurrency into pounds sterling

Also, purchasing assets using cryptocurrency can also trigger a CGT liability. As an example purchasing an asset, such as art, with cryptocurrency for £60,000 when your crypto originally cost you £50,000 will mean there is a CGT charge on the £10,000 of crypto gain.

9. Business Asset Disposal Relief

If you have sold a business, or you're selling a business asset, then Business Asset Disposal Relief (BADR) may apply. Where this is the case, CGT is charged at 10% on any gains you make from the qualifying business assets. This is particularly significant for higher-rate tax payers as the CGT liability could be halved from 20% to 10%. 

BADR is subject to a lifetime limit of £1m per person and applies to a sale for businesses trading as the following:

  • Sole trader
  • Partnership
  • Limited company
  • Joint venture
  • Trust

If you own a business then you should review your BADR position regularly, the rules are sophisticated and it's easy to deviate away from them. You'll therefore need to plan carefully prior to any sale to ensure you're fully compliant with the legislation.

It may also be worth considering transferring shares between spouses, or civil partners, if you're in a family business.

10. Inheritance Tax and gifting within exemptions

For Inheritance Tax (IHT), the 'nil rate band' (the amount that can be passed on through an estate before IHT is applicable) will remain frozen at £325,000 until April 2028. This hasn't changed since the 2010/11 tax year, despite rising asset values. 

Above this level, IHT is usually charged at 40% on assets, including money, that you leave to your beneficiaries. Keeping the nil rate band frozen, instead of increasing it with inflation, means an ever increasing number of estates will likely rise in value and end up being worth more than the threshold, therefore making them potentially subject to IHT.

If you're married, or in a civil partnership, then you can in effect combine your allowances with the effect of potentially doubling your nil rate band to £650,000 depending on your circumstances.

You should consider annual gifts as an effective, albeit limited, way to reduce your Estate and therefore the eventual inheritance tax liability. These must be outright gifts and so you should ensure that they would not affect your income or security as you will forego the right to the income or capital in the future.

  • Annual £3,000 exemption – This exemption should be used by most people who have an inheritance tax problem, provided the capital is liquid and not tied up in property. The amount is per person and so each spouse can make a gift of £3,000 per financial year.
  • Any part of this exemption not used in one year can be carried forward to the following year only. However, that year’s exemption must be used completely before using the part, which has been carried forward.
  • For people with large IHT problems, a gift of £3,000 a year may not sound like it will have a significant impact. However, consider that a married couple can gift £6,000 a year, and over 15 years this would place £90,000 outside of your Estate, thus saving £36,000 in inheritance tax.
  • It is important to ensure the money does not come from capital or the 7 year rule will apply if it's over £3,000 a year. Other gifts over £3,000 per year from capital made directly, are Potentially Exempt Transfers (PETs) which fall back into your Estate if you do not survive 7 years after making the gift.

Note that Gifts from one spouse or civil partner to another are always immediately free of inheritance tax. There is no limit as to the amount of the gift between spouses.

Of note, there is also a separate and additional nil rate band known as the ‘residence nil rate band’ which is applicable when considering the family home. If you're passing this property to a lineal descendant, or a spouse/civil partner of a lineal descendant, then you get a main residence band of £175,000. This works to then potentially raise your individual total IHT nil rate band to £500,000. For couples the band can rise to £1m where £350,000 of the value comes from their home.

As you will have noticed from the above, this tax is both subtle, and sophisticated. IHT contains various rules, and reliefs, that impact how much of your estate you hand over to the taxman.

Given the above, it would be wise to structure your affairs to make use of these reliefs and allowances. Start by asking yourself:

  • What can you pass on to future generations?
  • Is your will up to date to reflect this?
  • Will the assets that you retain in retirement provide you with sufficient income to fund your lifestyle?

For more information see our in-depth article here: Simple Hacks to reduce Inheritance Tax or even better book in for an IHT planning consultation contact us.

11. Stamp duty

Stamp duty is a payment to HMRC when you purchase a property, or land, in England and Northern Ireland. How much Stamp Duty Land Tax (SDLT) you owe, if at all, depends on the price paid and your individual circumstances as the buyer.

Changes that came into effect on 23 September 2022 will remain in force until 31 March 2025. This means if you're a first time buyer, you won't need to pay SDLT on the first £425,000 of the property you purchase, provided the property is worth £625,000 or less. Previously this was £300,000.

For existing homeowners, SDLT kicks in at £250,000, up from a prior level of £125,000.

12. Property Investments and the calculation of taxable income

If you have a buy-to-let property and you're a higher, or additional-rate taxpayer then you'll only be able to claim relief on the interest you've paid at the basic rate. It means your property income for tax purposes will no longer be fully reduced by any mortgage interest you pay.

You need to review this carefully, the implication being your taxable income could then exceed thresholds and that could then reduce your personal allowance (see the earlier section on income tax), thereby giving rise to a greater tax liability. 

If you have a spouse, or civil partner, and one of you is a basic-rate tax payer where the other is a higher-rate taxpayer, it may be advisable for the partner earning less income to be the recipient of taxable rents. This will be particularly pertinent if there is a loan on the property given interest relief is restricted.

Strategies such as the above are applicable if you're purchasing a second property for the first time. However, if the higher earner owns the property then options could include transferring up to 50% to the lower earner. This shouldn't trigger a capital gains charge, however, a SDLT charge would be incurred on the value of any borrowing taken on by the new owner if this is above the tax free threshold.

Be sure to take advice prior to any asset transfers because perceived tax efficiency could easily be reversed in the event other taxes are triggered by the transfer. This is why tax advice and strategy should be based on your whole circumstances and not just one single area of legislation. 

In some circumstances if may be advantageous to hold your property portfolio in a limited company. So long as the loan interest doesn't exceed £2m per year then your company can deduct interest in full as an expense when calculating profits from your lettings. Furthermore the company will pay up to 25% corporation tax on the rental profits.

Making use of a limited company should be considered carefully because distribution of the profits via dividends will probably give rise to taxation, and whilst transferring the properties shouldn't result in a CGT liability (subject to satisfying certain criteria), you will likely incur a SDLT charge based on their market value.

A property letting company can't qualify typically for BADR from CGT unless the lettings in question are furnished holiday lettings. If you have a high level of income from other sources then it's worth taking advice on the long term benefits of running your property portfolio through a limited company, albeit this will come with an administrative burden of running a company.

13. Letting a room in your home, and furnished holiday lettings

Rent a room relief provides an allowance to cover rents of up to £7,500 a year. This means you can rent out a room in your main residence for up to £144 a week and not be subject to income tax. The allowance is split between couples and if your income exceeds £7,500 then normal income tax rates apply. If you claim the allowance then deducting expenses is not applicable. 

Furnished holiday lets provide various tax benefits including:

  • Claiming capital allowances on part of the purchase price paid and development costs for refurbishment
  • If shared ownership, you can flexibly distribute profits, whatever the ownership percentage split, between you to help reduce your tax liability
  • Claim CGT reliefs should you sell the property including BADR, Business Asset Rollover Relief, and Gift Hold-over Relief
  • Claim business expenses for commercial use against your revenue such as utility bills, refuse collection, interest on associated loans, letting agency fees, advertising, cleaning products, maintenance costs, and cleaning costs

The conditions are that the property must be available for let for 210 days in the tax year (or relevant 12 month period). It must also be actually let for 105 days and each let period has to be less than 31 days.

14. Make use of savings and Individual Savings Accounts (ISAs)

You can shelter some savings interest from the taxman in banks, building societies, unit trusts, and trust funds, through the savings allowance. Whether this applies to you will depend on your income tax band.

You also have an allowance to invest up to £20,000 in an Individual Savings Account (ISA) in any given tax year. This is often referred to as a tax wrapper for investment. Anyone over the age of 18 can open an ISA in the UK. Lifetime ISAs only apply to the under 40 age group, while junior ISAs are for children under the age of 18 (with an annual investment ceiling of £9,000).

If you don't use the allowance in that year then it is lost. If you, and a spouse, each make use of the annual ISA limit, then you're able to save, or invest, £40,000 between you. Of note, there are different types of ISA for you to consider for your individual circumstances and what you're trying to achieve. 

Income and capital gains generated within an ISA are exempt from taxation. Making use of an ISA as a savings tool is therefore valuable for tax planning purposes, especially if your pension savings allowances have been maximised.

It is also very important to consider the implications of saving into various types of ISAs. We recommended you seek advice from an Independent Financial Advisor, or Financial Planner, prior to making any investment decisions. If you don't have one we can recommend high quality IFAs in St Albans.

15. Investment in the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

If you purchase shares in a business that qualifies as an EIS investment, then your tax liability can be reduced, for either the year of investment, or the prior year, under a carry back claim by up to 30% of the amount you invested.

If you have capital gains from other disposals in the last 36 months, or the following 12 months, these can be re-invested in EIS shares resulting in the availability of CGT deferral relief. This defers the CGT until the new investments are subsequently disposed of. The annual cap on EIS investments is £1m.

An SEIS investment provides income tax relief of up to 50% of the amount you invested in either that tax year of investment, or the previous tax year under a carry back claim. The annual investment limit for SEIS is £200,000.

Any gain under EIS, or SEIS, is usually CGT free if the investment is held for at least 3 years. If your shares are sold at a loss, you can set that loss against income tax for that year, or the previous year.

Of note, prior to making an investment of this nature, it's wise to go through advance assurance with HMRC to understand whether the company in question, and the investment, meet the conditions of the schemes.

If you don't go through this and HMRC subsequently decide the investment doesn't qualify, this would prevent you from accessing the reliefs, leading to a greater than originally anticipated tax liability.

16. Investment in Venture Capital Trusts

Venture Capital Trusts (VCTs) are specialist investments that offer tax breaks so that you can put money in small, high risk organisations and securities. Investment in VCTs offer:

  • Income tax relief at 30% of the amount invested so long as the investment is held for a minimum of 5 years
  • VCT shares are CGT exempt, assuming they rise in value
  • Dividends on VCT shares are tax-free

Of note, gains from other assets can't be rolled into purchasing VCT shares. Similar to the points in relation to EIS and SEIS, it would be wise to seek advance assurance from HMRC prior to any investment decision.

17. Other tax efficient investments

Investing in an accredited Community Development Finance Institution (CDFI) through share purchase, or lending, can make you eligible for community investment tax relief. CDFIs are established with the purpose of providing financial support to both profit-making, and non-profit, organisations in underprivileged areas.

Under this relief, you can receive 5% of your investment as tax relief in the year of investment and for the following 4 years, amounting to a total relief of 25%. Certain conditions need to be met, with the most crucial one being that you must hold the investment for a minimum of 5 years. If you incur losses, you can offset them against your other income in the year they occur.

Your personal car, or motor vehicle, is exempt from CGT. This means you can invest in classic cars and if they rise in value then any gains made from a sale mean you aren't subject to taxation. Of note however, if you incur losses from the sale of these assets, they can't be offset against gains made elsewhere.

18. Pension savings

For the 2023/24 tax year, although there is a lifetime allowance on the total amount you can hold for all your pension funds of £1,073,100, there is an exemption from tax charges above this amount in place so there are no penalties. However, from 6 April 2024 the lifetime allowance will be scrapped completely.

There is also an annual allowance for pension contributions which, for employees, currently stands at £60,000, or 100% of your qualifying earnings depending on which is lower. This is made up of both Employer and Employee contributions added together. Employee contributions are grossed up by x1.25 to calculate their value for the annual allowance. Employer contributions count at 100% of the value contributed and is not linked to qualifying earnings. For Owner/Directors, who may be on low salaries, consider Employer contributions to reduce your Corporate tax bill.

The total for personal and employer contributions reduces by £1 for every £2 of an individual’s ‘adjusted income’ over £260,000 and can impact if your ‘threshold income’ from all sources is over £200,000. The annual allowance tapers down to a minmum of £10,000 for this tax-year.

The concept of carry forward allows you to make use of any annual allowance that you haven't used in the 3 prior tax years. This only applies if you were a member of a registered pension scheme during that time frame.

If you have unused allowances from 2020/21, 2021/22, an/or 2022/23 then these can be applied potentially in the 2023/24 tax year. Breaching the rules by paying in too much, on the other hand, results in an annual allowance charge, at your marginal rate of tax. Remember you have to fill the current tax year's allowance before backfilling carry forward allowances.

After the age of 55, you can access your pension pot with the option to draw 25% of it tax free. This is for you to do with it as you please. Be warned though as withdrawals have income tax implications and could result in you moving into a higher tax band. Once in drawdown your annual allowance becomes the money purchase annual allowance and is capped at £10,000 pa.

Get your tax planning right for the tax year 2023-2024

There are lots of strategies to think about depending on your personal circumstances, so we recommend talking to the experts at Visionary Accountants in St Albans. Contact our team of Tax Planners and Accountants on 01727 730550.

Next week's article will be discussing year-end tax planning for businesses...

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