With the end of the tax year approaching on 5th April, now is a good time to review your tax position and take some simple steps to make sure your tax affairs are as efficient as possible.
- Maximise your tax-free savings by using up your ISA allowance which currently stands at £20,000.
- Open a LISA and get a 25% Government credit. Invest the maximum £4,000 and they will give you £1,000 for free. These savings can be used to buy your first home or save for retirement. Do check out the small print regarding early withdrawal and house purchase before taking the plunge. You can invest if you are aged 18-40 years.
- Junior ISA’s – £9,000 can be invested on behalf someone aged 18 and under and can be added to by anyone, not just the parents.
- Pension Contributions – you can invest up to £40,000 or 100 per cent of your qualifying earnings (whichever is lower) with a potential carry forward for up to three years of unused allowances. If you have a pension and now wish to contribute a lump sum, you could therefore invest £160,000 before the end of the tax year! Smaller contributions of up to £3,600 (gross) can be paid by or on behalf of those who do not have relevant earnings. Also be careful if your pension pot is close to £1,073,100 (the Lifetime Allowance). If you are at all unsure about whether adding to your pension is the best thing to do, you must take advice from an IFA.
- Charitable donations made under the gift aid scheme offer benefits for both the donor and the charity. A cash gift of £80 will result in a £20 uplift for the charity so the total donation would be £100. For higher rate taxpayers, the donor receives tax relief of £20, so the cost of making a £100 donation is only £60. The effective cost for additional rate taxpayers is even less.
- Leaving at least 10% of your net estate to charity will reduce the IHT rate to 36% on the rest of your estate.
- Inheritance tax – consider using your annual exemption for gifts of £3,000. If you haven’t used last year’s you can use that too, making a total of £6,000 out of your potential estate immediately (and that alone saves £2,400 in IHT!). Parents may make gifts in consideration of marriage of £5,000, grandparents the same but for £2,500 and if you are not a relative then up to £1,000 to any other person. There is a small gifts exemption of £250 which can be made to any number of people if another exemption has not been used on them. Normal expenditure out of income is immediately exempt if you can show gifts do not impact on your day-to-day living standards.
- Nil Rate Band (£325,000 in 2022/23) – Reconsider your Will and who assets are being left to and in what form. Careful planning on this topic is often at the back of people’s minds and sadly it is not unknown for planning to be left until it is either too late, or it is not done at all with unnecessary tax loss then incurred by those left behind.
Sharing your assets
- Your spouse or civil partner may earn more, or less, than you. Could you equalise income and/or use each other’s allowances and basic tax rate bands?
- If you hold assets standing at a gain, you can make those gains tax-free if they are below the annual capital gains tax exemption of £12,300 per person. You could even buy the asset back (shares for example) after 30-days but don’t get caught by bed-and-breakfasting rules! If you have a spouse or civil partner, then you might transfer assets between you to maximise allowances. This can even work with children in some circumstances. The annual exemption cannot be carried forward or transferred, so aim to make disposals before 6 April 2023 to utilise this year’s exemption. The CGT allowance is set to halve from 6 April 2023, and halve again from 6 April 2024.
- Rent-a-room Relief – Renting a room in your main residence can be done tax free, where the rent is less than £7,500. Over that amount you only pay income tax on the excess! New rules have been introduced to counter absenteeism from a main residence, where rent-a-room relief is being claimed. A married couple or civil partnership have only one limit between them.
None of the foregoing constitutes advice. Individual circumstances differ and if you are planning on any of the above then you should seek the advice of a properly qualified professional who will be able to advise you whether your plans are suitable in your own circumstances.
Please get in touch if you are looking for specialist personal tax advice.