Year End Tax Planning Guide
Helping to reduce the amount of tax you pay now and in the future
Download this Year End Tax Planning Guide
In all things tax, time is of the essence.
Checking that your personal affairs, your family and business affairs, and your plans for the long term are arranged as tax efficiently as possible is always important: and the period before the end of the tax year, on 5 April 2023, is the best time to do so.
This year, such a review may be even more beneficial than usual. Major change to tax bands and allowances has been announced over the course of 2022. This means some last-chance opportunities to make use of allowances at current rates and to access current tax bands. Similarly, there may be areas where you have discretion over the timing of income and it is worth establishing whether income is better taken this year or next. Here again,
a review before 5 April 2023 could have a significant effect on your tax position. For Scottish taxpayers, for whom higher and top tax rates are set to increase as well, there is even more to think about.
As your accountants, we have the all-round vision of your circumstances that can really help make an impact. To make the tax rules work to your advantage, it’s best to start the discussion as soon as possible before
5 April 2023. We look forward to being of assistance.
In this Briefing, we use the rates and allowances for 2022/23. Please note that throughout this publication, the term spouse includes a registered civil partner.
If you would like any assistance with any of these points.
Planning potential for director-shareholders
The outlook changes significantly with recent and forthcoming changes:
- change to corporation tax rate for some companies
- fall in the Dividend Allowance from 6 April 2023
- higher rates of income tax on dividends introduced in 2022 set to continue
- fall in additional rate (top rate in Scotland) threshold from 6 April 2023.
Corporation tax
From 1 April 2023, the main rate of corporation
tax rises to 25%. Not every company will pay at
this rate, however. Profits exceeding £250,000
will be charged at the main rate, but a small
profits rate of 19% applies where profits do
not exceed £50,000. Companies with profits
under this level, therefore, effectively see no
change. For companies with profits between
£50,000 and £250,000, the tax rate is tapered.
These companies pay at the main rate reduced
by marginal relief: essentially, the tax rate
increases from 19% to 25% depending on the
level of profits. Limits are adjusted where there
are associated companies. HMRC has created
an online tool to demonstrate how marginal
relief works: this can be accessed on gov.uk, by
searching for ‘marginal relief calculator’.
Director-shareholders in companies with higher
levels of profits are likely to need to plan for the
cash flow implications of higher corporation
tax bills.
The overall picture is less favourable for the
future. The Dividend Allowance is set to fall,
Dividends
The overall picture is less favourable for the
future. The Dividend Allowance is set to fall,
while dividend tax rates are at a new high,
making the extraction of profits by way of
dividend payment more expensive.
Dividends falling within the Dividend
Allowance are not taxable, and for 2022/23, the
Dividend Allowance is £2,000 per year. From
6 April 2023, however, it falls to £1,000, with a
further fall to £500 per year from 6 April 2024.
The change is likely to impact more than 3.25
million individuals in 2023/24.
The effect of this change is compounded by
the increase in dividend tax rates. From April
2022, rates rose by 1.25 percentage points. They
are now 8.75% for dividends falling within the
basic rate band; 33.75% for those falling in the
higher rate band; and 39.35% where falling in
the additional rate band. Though the increase
was originally part of the measures around the
Health and Social Care Levy, the rates are set to
continue, despite the fact that the Health and
Social Care Levy has been scrapped.
Impact on profit extraction
strategy
Traditionally, many director-shareholders have
relied on a combination of low salary and a
significant level of dividend payments to extract
profits. Tax advantage has arisen from the
availability of the Dividend Allowance, a low
rate of corporation tax, and because dividends
do not incur National Insurance contributions
(NICs) – a saving both for the employer company
and the recipient. These advantages are now
being undermined.
Dividends are paid out of retained profits, that
is profits on which corporation tax has already
been paid. In future, for companies with profits
above £50,000, this will mean profits subject
to a higher rate of corporation tax, and thus
a reduction in the reservoir available to pay
dividends. And as the Dividend Allowance
shrinks, there will be a much less significant
amount available for extraction free of tax.
Although incorporation is about more than just
tax advantage, these changes make it prudent
to keep under review the question of whether a
company is the best structure for your business.
Remuneration: last-chance
opportunities
An appraisal of remuneration strategy is always
beneficial. The best solution for you will depend
on your individual circumstances. Given the
increasing burden of income tax for Scottish
taxpayers, it may even vary depending on where
in the UK you are based. However, in every
case, the form (bonus as against dividends)
and timing of remuneration take on unusual
significance for director-shareholders this year,
with the potential to impact the overall tax
position even more than usual.
Planning potential: watch timing
Dividend payment in the 2022/23 tax year gives
a last-chance bite at the current higher Dividend
Allowance, and the higher additional rate
threshold (top rate in Scotland). You may want
to consider accelerating payment of dividends if
there is scope to do so.
Procedure around declaration and payment
of dividends is complex and it is important
to check that it is done correctly. In times of
economic stress, it is also important to be sure
that there are profits available for distribution.
Here to help
Please do contact us to discuss any of the
issues raised here.
If you would like any assistance with any of these points.
Planning potential:
income tax rates and
allowances
A review of planning possibilities in the light
of the Autumn Statement, and the Budgets in
Wales and Scotland.
Key points to note are:
• the personal allowance (PA) is frozen at £12,570 until 5 April 2028 across
the UK
• the basic rate band is frozen at £37,700 for the same period (England,
Wales and Northern Ireland). This means that the point at which
someone with the standard PA starts to pay higher rate tax continues to
be £50,270 until 2028
• the additional rate threshold (top rate threshold in Scotland) falls from
£150,000 to £125,140 from 6 April 2023. Note too, that £125,140 is the
figure at which all PA is lost (see below)
• no change to tax rates in England, Wales and Northern Ireland.
Year to 5 April 2023
Band Income Tax rate
Basic rate £12,571 to £50,270 20%
Higher rate * £50,271 to £150,000 40%
Additional rate * Above £150,000 45%
*
| Band | Income | Tax rate |
|---|---|---|
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate * | £50,271 to £150,000 | 40% |
| Additional rate * | Above £150,000 | 45% |
Wales and Scotland
Although Wales is able to set certain tax rates, the position for Welsh
taxpayers in 2023/24 is expected to be the same as for English and
Northern Irish taxpayers. In its latest Budget, the Welsh government
reiterated that it will not increase the Welsh rate of income tax ‘for at least
as long as the impact of coronavirus lasts’.
The position is different in Scotland, where the December 2022 Budget
announced:
• change in the top two income tax rates from 6 April 2023, meaning that
the Scottish higher rate thus rises to 42%, and the top rate to 47%
• the top rate threshold will fall to £125,140 from the same date.
| Band | Income | 2022-23 | 2023/24 |
|---|---|---|---|
| Starter | £12,571 to £14,732 | 19% | 19% |
| Basic | £14,733 to £25,688 | 20% | 20% |
| Intermediate | £25,689 to £43,662 | 21% | 21% |
| Higher | £43,663 to £150,000/£125,140 * | 41% | 42% |
| Top | Above £150,000/£125,140 * | 46% | 47% |
Impact of recent announcements
Much has been made of these changes representing a ‘stealth’ tax, because
as wages rise, a bigger slice of income falls to be taxed. This will be
particularly noticeable in a time of inflation. Freezing the PA and basic rate
band, for example, will push more people into the higher rate tax band.
There will be a similar effect in Scotland, where the tax burden for some
individuals is already higher than for equivalent earners elsewhere in the
UK. And for Scottish taxpayers, it is also important to factor in the increase
in the top two rates of tax, as well.
Lowering the additional rate (top rate in Scotland) threshold will
significantly increase the tax take from those on higher incomes. It is
expected to bring something approaching a quarter
Last-chance opportunities
Where income is expected to be between £125,140 and £150,000 in 2023/24,
bringing income into 2022/23 could mean the difference between being
taxed at 40% in 2022/23, rather than being taxed at 45% in 2023/24; or
between 41% and 47% in Scotland. Scottish taxpayers may also want to
accelerate income to reduce the impact of the 1% rise to both the higher
and top rates of income tax.
There are a variety of ways that this may be done, and we can help you
review the possibilities in your circumstances.
Getting the best out of the personal allowance
Everyone has a PA. Look, wherever possible, to use the PAs available in
your household. Now that the PA has been frozen, planning to avoid its
being wasted assumes new importance.
The standard PA is £12,570 throughout the UK. It can be higher if you are eligible for the Blind Person’s Allowance; or have an income less than the PA, and are eligible to make a transfer
of what is called the Marriage Allowance to your spouse.
You start to lose the PA if you have what is called ‘adjusted net income’ over
£100,000. Adjusted net income is, broadly speaking, total taxable income
before personal allowances, but after some deductions such as Gift Aid. The
PA is clawed back by £1 for every £2 of adjusted net
Planning potential: keeping the personal allowance
If you are in the £100,000 – £125,140 income bracket, planning to keep
your taxable income below £100,000 can help you keep the PA. There are
various possibilities here, including the following:
• where one spouse is in a lower tax band, married couples may have
opportunities to redistribute income, or transfer income-producing
assets
• there can be further planning potential if you are in business with your
spouse. If you are in partnership, for example, it may be possible to
review the profit-sharing ratio. If you are self-employed, increasing
wages for a spouse who works in the business is another possibility,
provided that this is commercially justifiable and reflects the underlying
reality of the way your business is run.
These are areas in which it is important to make sure that arrangements
are fully compliant with relevant legislation, and we should be happy to
advise further. Do please talk to us prior to action.
If you would like any assistance with any of these points.
Planning potential: tax and your family
Looking at household income in the round, and planning to make optimal use of all allowances
available is likely to create the most tax-efficient solutions.
You and your spouse
The income of each spouse is taxed separately, with each party being
entitled to a personal allowance. Capital gains are also taxed separately,
each party having their own annual exemption (see below).
Where you each have a different tax band, a key part of planning is getting
the right distribution of income between you. This can ensure that the
personal allowance of the lower income spouse is not wasted, and give
access to lower tax bands. Transferring income-producing assets, such as
property, stocks and shares, or even bank accounts, can be an efficient way
to do so. Anti-avoidance legislation exists in this area, and we recommend
taking advice prior to any action, to ensure that any arrangements are
compliant. It is important, for example, that the transfer is an outright
gift, with the donor no longer exerting control over it, or deriving a benefit
from it. Appropriate evidence of such transfer is needed.
Planning potential: allocate income
An optimal allocation of income between spouses can only become more
important in the future, especially with the fall to the additional rate (top
rate in Scotland) threshold for income tax.
High Income Child Benefit Charge (HICBC)
Where either you or your partner get Child Benefit, and have adjusted net
income more than £50,000, the HICBC applies. Note that for the HICBC,
‘partner’ doesn’t just mean spouse or civil partner, but includes someone
you live with as if you were married.
The HICBC claws back Child Benefit at a rate of 1% for every £100 of
income between £50,000 and £60,000. By the time income is £60,000, all
Child Benefit payment is effectively lost. You can disclaim payment in
these circumstances, to avoid having to pay the charge: but it is usually
recommended that the actual claim itself is continued, in order to
maintain eligibility for the State Pension.
If both you and your partner are over the income threshold, HICBC is the
responsibility of whoever has the higher income. Where income reaches
£50,000, the taxpayer has an obligation to notify HMRC of their liability
to the charge. HMRC may make the initial contact, but this should not be
relied upon.
Planning potential: the HICBC
Think tactically where there is discretion over how income is distributed
between you and your spouse. £100,000 split equally between you and
your spouse, for example, keeps you out of HICBC: if it is all taxable
on one spouse, the benefit of Child Benefit payment is lost. We can
help you review ways to reduce or redistribute taxable income in your
circumstances.
Tax and your children
Children are treated independently for tax purposes. They have their own
personal allowance, annual capital gains tax exemption and their own
basic rate tax band and savings band. From a tax perspective, it is usually
more efficient for grandparents – rather than parents – to provide funds for
investment for under-age children.
When it comes to funding children through university, parental input is
increasingly common, and the purchase of housing is something often
considered. It is important that any such arrangement is structured
correctly. Key questions are who owns and buys the property – whether
it is the parents, or the parents and child together, or whether the child is
provided with funds to make the purchase. The tax and legal implications
need to be thought through, alongside your personal and family
preferences.
Planning potential: the rent-a-room scheme
Children living in a property at university which they own outright, and
letting out furnished accommodation in the property, may be able to
benefit here. Provided the relevant conditions are met, the scheme could
allow them to earn up to £7,500 in rent, free of tax. When added to the
personal allowance, this provides scope for £20,070 in tax-free income.
If you would like any assistance with any of these points.
Planning potential: savings and investments
Savings
Interest of up to £1,000 from savings such as
bank and building society accounts, unit trusts,
and trust funds, can be sheltered from tax
by the Savings Allowance. Availability of the
allowance depends on your tax band.
| Income tax band | Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| additional rate | £0 |
The allowance applies across the UK. Scottish
taxpayers therefore need to assess their savings
position based on UK rates.
Individual Savings Accounts (ISAs)
ISAs are sometimes referred to as a tax
‘wrapper’ for investments: they allow you to
make a tax-efficient investment, rather than
dealing directly in the investment market and
facing the tax consequences attaching.
The tax benefits here are considerable. ISAs
are free of income tax and capital gains tax and
do not impact the availability of the savings or
Dividend Allowance.
Anyone over the age of 18 (or 16 for a cash ISA),
who is resident in the UK, can open an ISA: for
Lifetime ISAs, applicants must also be under the
age of 40. Crown servants and their spouses not
living in the UK are also eligible. Junior ISAs are
available for children under 18.
There are four types of ISA: cash ISAs, stocks
and shares ISAs, innovative finance ISAs and
Lifetime ISAs. The total you can invest in any
tax year is set by the government: for the tax
year 2022/23, it is £20,000. This can be allocated
across the different types, as you choose.
Although you cannot hold an ISA with, or on
behalf of, someone else, you and your spouse
each have an ISA subscription limit: this
means you can invest £40,000 between you. It
is also possible to open and manage an ISA for
someone lacking the mental capacity to do so
for themselves. This is done by applying to the
Court of Protection for a financial deputyship
order. In Scotland, application would be to the
Office of the Public Guardian in Scotland.
Planning potential: review your position
each year
ISA limits cannot be carried into future years.
Use it before 5 April 2023, or lose it.
ISA subscription limits
| Type of ISA | 2022/23 Limit |
|---|---|
| Cash ISA | £20,000 |
| Stocks and shares ISA | £20,000 |
| Innovative finance ISA | £20,000 |
| Lifetime ISA | £4,000 |
| Junior ISA | £9,000 |
Looking forwards, once the capital gains tax
annual exemption falls from 6 April 2023, ISAs
become an even more important tool for tax
planning.
Tax-efficient investments
The venture capital schemes, providing finance
for new, higher-risk companies, continue to
afford individual investors with a significant
source of tax relief.
The Enterprise Investment Scheme (EIS), Seed
Enterprise Investment Scheme (SEIS) and
Venture Capital Trusts (VCTs) were subject to
sunset clauses in the original legislation, but
have now been given a new lease of life. The
government has given a commitment to extend
them beyond 6 April 2025, and is changing
some of the detail of the rules to provide more
generous relief. This is the case with the SEIS,
which offers the potential for 50% income tax
relief, and where, from 6 April 2023, the annual
investor limit doubles to £200,000. Please do talk
to us for further details of any of these schemes.
Planning potential: capital gains tax
A phased reduction in the capital gains tax (CGT) annual exemption is
on the horizon. Currently £12,300, the exemption falls to £6,000 from
6 April 2023. A further reduction takes effect from 6 April 2024, when it
drops to £3,000. The move is expected to raise an additional £25 million
in tax revenue in 2023/24 alone, and it makes planning in this area even
more important.
A key component of any such planning is to make best use of the annual
exemption. It is possible to transfer assets between you and your spouse
on a no gain/no loss basis in order to make best use of the exemption. It
is essential to get the detail of any transfer correct. Do please discuss any
disposal with us first to make sure that it is effective for tax purposes.
CGT is charged at a lower rate of 10% (18% on residential property) for
UK basic rate taxpayers and 20% (28% on residential property) for UK
higher and additional rate taxpayers. Where one spouse is a higher rate
taxpayer, and the other has not used their basic rate band in its entirety,
transfer of assets thus has the potential to enable access to the 10% tax
rate, rather than the 20% tax rate. Note that Scottish taxpayers pay CGT
based on UK rates and bands and therefore need to assess their position
based on UK rates.
If you would like any assistance with any of these points.
Planning potential: Gift Aid
It is not always appreciated that donations made under Gift Aid aren’t just good for the recipient
charity or community amateur sports club. They can also be a useful planning tool for the donor –
and even generate tax refunds for some taxpayers.
Gift Aid benefits donors, too
Gift Aid donations work to your advantage
in reducing the calculation of your taxable
income. This means that a timely gift before
5 April 2023 may help keep income under
various key tax thresholds, such as:
• High Income Child Benefit Charge, where
clawback starts for income above £50,000
• abatement of the personal allowance, from
£100,000
• the additional rate threshold (top rate in
Scotland).
Tip: repayment potential
If you pay tax at more than the basic rate, you
are entitled to claim tax relief at your top rate
of tax on the donation. This means that you
get the difference between the basic rate and
higher rate tax on the donation. In the year to
April 2022, HMRC statistics suggest that some
£540 million was due in such relief. Many
higher rate taxpayers, however, fail to claim
the repayment due.
A repayment claim is made either via the self
assessment tax return, or by asking HMRC to
amend the tax code. Make sure there is a valid
Gift Aid declaration in place for all gifts, and
that you record the date, amount of each gift
and name of the recipient charity to back up
your claim.
Timing is everything
A carry back election can be made, meaning
Gift Aid donations are treated as if made in the
previous tax year – something which can be of
benefit, for example, where income is uneven.
Strict time limits and other rules apply here,
and we are happy to advise further.
Tip: decide which tax year to use
If you are likely to pay higher or additional
rate tax (top rate in Scotland) in 2023/24, Gift
Aid donations in that year should have the
potential for a larger repayment. If you are
making any substantial donation, and you
have discretion over timing, consider whether
a donation in 2023/24 is preferable to one in
2022/23.
Compliance
HMRC statistics in 2021 showed a tax gap
attributable to Gift Aid of around £179 million:
that’s the figure claimed by donors who are
not, in fact, eligible to use the scheme. It’s
always important to check that you have
enough income tax or capital gains tax in
charge to cover Gift Aid donations. Where
there is an error, the donor rather than
the charity or CASC, has to make good the
shortfall.
If you would like any assistance with any of these points.
Year end checklist
- Evaluate last-chance opportunities to access current tax rates, tax bands and allowances
- Director-shareholders: review profit extraction strategy
- Maximise allowances available across the family
- Take advantage of 2022/23 ISA allowance
- Assess payments made under Gift Aid
- Review and update pension arrangements
- Re-examine wills and estate planning
- Be aware that reviewing your affairs before 5 April 2023 gives the best scope for tax efficiency.
Working with you
We are here to help: so please
make good use of us. This
guide is designed to help
identify some of the areas that
could have a significant impact
on your overall tax position.
Please consult us in good time
to maximise the opportunities
available.
Disclaimer – for information of users: This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication and no action should be
taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material
contained in this newsletter can be accepted by the authors or the firm. 2022/23
If you would like any assistance with any of these points.