Whatever in announced in the Chancellor’s Budget on 15 March, it’s highly unlikely that any of the major personal tax measures announced in the Autumn Statement will be altered. And that means millions of households face paying more to the Treasury from 6 April, and even more in the years to come.
Already the number of people drifting into paying 40% tax has been increasing at a rate of about 10% per year over the last few tax years, to a record 5.5million currently. Given current the rate of nominal pay increases there are likely to be nearly 7million higher-rate taxpayers in a couple of years’ time. HMRC has predicted that 301,000 more people will become additional rate taxpayers by 2027/28. Even those who do not cross into a higher tax-band will pay more income tax and National Insurance as frozen allowances mean more of their earnings are taxable. Moreover, when it previously estimated the impacts of reducing the annual capital gains tax exemption by £6,000 – as will occur this April – HMRC concluded an additional 235,000 people would need to report their capital gains.
Anthony Whatling, Tax Partner at wealth manager Evelyn Partners, says he has been reminding clients that crucial allowances are being cut from April 2023 and most rate bands are frozen: “It’s one of the most decisive tax-year ends in decades, so it’s definitely time for earners, savers and investors to review their tax position. Many allowances are calculated on a yearly basis, so a pre year-end review can help to identify any potential tax savings, with the changes afoot. Even if it’s too late to take some steps by the end of this tax year, tax planning is a year-round exercise, and it pays to look well ahead.”
Here he sets out key areas where there are possible mitigating steps to take.
- Reducing taxable income and the 60% trap
The highest rate of tax is 45%, applying to individuals with total income over £150,000. Personal allowances are tapered for individuals with income between £100,000 and £125,140 (2022/23), giving an effective tax rate in this band of 60%.
You can help reduce taxable income, which can be particularly tax efficient if you fall into this 60% effective rate band, by:
∙ making pension contributions or charitable gift aid payments;
∙ transferring income-generating assets between spouses/civil partners
∙ using tax-free investments and/or tax efficient investments;
∙ investing in assets which generate capital growth rather than income; and
∙ altering the timing of income to maximise use of lower rate bands.
From April 2023, the additional rate threshold will be reduced to £125,140, meaning that anything over the effective 60% rate band will be taxed at 45%. This provides an additional incentive for some taxpayers to move income to the current tax year, although it will also accelerate the resulting tax payment. In Scotland, where income tax will rise 1% in the higher and additional rate bands in 2023/24, this becomes more significant.
- Pension contributions – using your annual allowance
Pension contributions are still a really tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. This benefit is accentuated in payroll systems that also afford relief against National Insurance contributions, for instance salary sacrifice. Employees might find their employer is receptive to introducing such a scheme.
Tax relief is restricted to the lower of your annual allowance (typically £40,000) and what is known as your net relevant earnings. You may also be able to take advantage of any unused annual allowance from the previous three tax years to make additional pension contributions under the “carry forward” rules.
This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so advice can often be useful. There is a risk of future changes to this reasonably generous relief, meaning it is worthwhile considering taking full advantage of the current allowances now.
- Giving to charity can also save you tax
If you pay tax at the 40% rate or higher, you may benefit from tax relief on gift aid donations you make to charity. Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief.
Individuals can gift quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from capital gains tax.
- Tax on your savings income – sharing with your spouse
Some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and £2,000 for dividend income in 2022/23. Savings and dividend income falling within these bands is taxed at 0%. Separate to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers.
Spouses and civil partners should review who holds any savings that generate taxable income to ensure these allowances and rate bands are utilised efficiently. You should be aware though that the dividend allowance will halve from April 2023 to £1,000 and then halve again to £500 from April 2024.
- Making use of tax-free or tax-efficient investments
There are various tax-free and tax-efficient investments available, and our financial planning specialists can advise you on whether or not any of these investments are suitable for you.
You can consider making tax-free investments through ISAs or National Savings. The annual ISA subscription limit for 2022/23 is £20,000, and this limit cannot be carried forward if not used. You can also consider Junior ISAs for children under 18 (2022/23 limit £9,000). Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As ISA income is not taxable, this allows you to give cash to your children without having to pay tax on the income generated.
Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments may provide tax relief and the opportunity to defer capital gains. These investments are considered high risk, and there is a risk of further changes to the schemes, potentially even at the 15 March 2023 Budget.
- Capital gains tax – it’s all about the timing
As capital gains tax is charged when an asset is sold, you have some control over when to pay it. If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is £12,300 in 2021/22.
Crystallising unrealised losses to offset gains may also be an option. You can consider selling an asset which stands at a loss, or making a ‘negligible value’ claim on assets that currently have no value. Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses.
The capital gains tax annual exempt amount will more than halve to £6,000 from April 2023 and will then halve again to £3,000 from April 2024. This may provide an incentive to accelerate gains if you have unused allowance in the current tax year, as planning around the annual exempt amount will become more difficult.
- Inheritance tax – making use of reliefs
Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years. This £3,000 annual allowance can only be brought forward for one tax year, so if you have assets to spare you may want to consider using up this and last year’s allowance before 5 April.
The current year’s allowance is automatically used first. It is per donor, not per recipient, so a married couple can make gifts independently. Rate bands and allowances for IHT are currently frozen. There is a risk that the Spring Budget on 15 March 2023 will bring further changes to IHT, so you may wish to consider making good use of the current allowances where possible.