With the impact of double-digit inflation, a five-year freeze on most allowances and tax bands, as well as cuts to Capital Gains Tax and dividend allowances looming over the next two years, it’s likely that many people will be feeling the effects of financial constraints.
There are several approaches that you can use for end of year tax planning, including making use of your ISA and pension allowances, reviewing your CGT position, and claiming tax relief for charitable donations. It’s also important to consider your income tax position and whether there are any adjustments you could make to optimise your tax position.
To help you make the most of your tax planning opportunities, we’ve put together the following tax year end checklist. By following this checklist and considering the strategies outlined, you could help to optimise your tax position and make sure you’re taking advantage of all the available allowances and reliefs.
Don’t forget to speak with one of our financial advisers if you’re unsure about the best course of action for your individual circumstances.
Pension saving: maximising tax relief
One way to optimise your tax position before the end of the tax year is to make use of your pension allowances. Not only can saving into a pension help you build up a retirement fund, but it can also offer tax benefits. The government provides tax relief on pension contributions, meaning that you can make contributions to your pension and receive basic rate tax relief at source. If you’re a higher-rate taxpayer, you could benefit from claiming additional tax relief due through your tax return, as the band at which you pay basic rate tax is extended by the gross pension contribution you’ve paid. The tax position is different where contributions are paid via salary exchange/sacrifice.
Once you have utilised the current year’s annual pension allowance, you may have the ability to also make use of unused allowance from the previous three tax years.
To maximise your tax relief, consider making a lump sum contribution before the end of the tax year. Keep in mind that there are annual and lifetime limits on pension contributions, so be sure to check that you’re not exceeding these limits.[1]
Higher earners may be able to increase their annual allowance for pension contributions by contributing before the tax year-end
Higher earners who are concerned about breaching the annual allowance for pension contributions may benefit from making a pension contribution before the tax year’s end. This can help to increase their annual allowance, and potentially reduce the tax they pay. As of the 2022/23 tax year, the standard annual allowance for pensions is £40,000, but for those with higher incomes, this allowance may be reduced through the tapered annual allowance rules. Contributing before the tax year end can potentially help to increase a tapered annual allowance for the current tax year. However, it’s important to consider the impact of any contribution on your individual circumstances, as well as any potential changes to the rules around pensions tax relief.[2]
Utilising Your ISA Allowance for End-of-Year Tax Planning
One approach to end-of-year tax planning is to consider utilising your ISA allowance before the tax year-end. ISAs (Individual Savings Accounts) offer a tax-efficient way to save and invest, with no capital gains tax on any growth and no further tax to pay on any income generated. As of the 2022/23 tax year, the ISA allowance is £20,000, meaning that you can save up to this amount in an ISA each tax year. Utilising your ISA allowance before the tax year end can help to ensure that you’re making the most of this tax-efficient saving and investing opportunity. This could involve contributing to an existing ISA, opening a new ISA account, or transferring funds between ISA providers.[3]
Consider sacrificing a portion of your bonus for an employer pension contribution
Employees who receive a bonus from their employer may want to consider sacrificing a portion of that bonus in exchange for an employer pension contribution. By doing this, they can increase their pension savings and potentially reduce their tax bill. Before making any decisions, it’s a good idea to speak to a financial adviser and consider your individual circumstances.[4]
Paying Missed National Insurance Contributions
If you’ve missed paying National Insurance (NI) contributions in the past, it could be worth considering making up those missed payments before the end of the tax year. This can help to protect your entitlement to the state pension, which is based on the number of years that you have paid NI contributions. You can check your NI record and make voluntary contributions using the government’s online service. It’s worth noting that there are different classes of NI contributions, so it’s important to check which class you need to pay and whether it’s worth doing so based on your individual circumstances.[5]
Boost Retirement Savings: Take Business Profits as Pension Contributions
Company directors who are looking to maximise their pension savings may consider taking their profits as pension contributions, (before the end of the company’s financial year rather than the tax year). By doing so, the company contribution may be allowable for deduction as a legitimate business expense, and potentially reduce them subject to corporation tax.
For the Sole Traders and Partners, they get tax relief using the relief at source system on the pension contributions they make for themselves.
This strategy may be particularly useful for those who are looking to retire in the near future, as it allows them to make significant contributions to their pension pot in a tax-efficient way. However, it’s important to consider the impact of this strategy on the cash flow and liquidity of the business. Business owners should also seek advice from a financial professional to ensure that this strategy is appropriate for their individual circumstances.[6]
Investments: Utilise CGT Annual Allowances to Take Profits
One approach to end-of-year tax planning is to consider taking profits on your investments to make use of your Capital Gains Tax (CGT) annual allowance. As of the 2022/23 tax year, the annual CGT allowance is £12,300, meaning that you can make gains up to this amount without paying any CGT. This allowance will reduce by over 50% to £6,000 next tax year.[8] By taking profits up to the annual allowance, you can effectively reset the cost basis of your investments and potentially reduce future tax liabilities. It’s important to note that CGT rates can vary depending on your income tax bracket, and that tax rules are subject to change.[7]
In conclusion, taking the time to review your finances and consider your tax planning options before the end of the tax year can be a wise move. By making use of various allowances, contributions, and investments, you can help to ensure that you’re making the most of your money and potentially reducing your tax bill.
However, it’s important to consider your individual circumstances and seek professional advice where necessary. With the tax year end approaching, now is the time to act and make any necessary adjustments to your financial plan.
By doing so, you can start the new tax year on the right foot and work towards achieving your financial goals!
