Year-End Tax Planning: Strategies to Consider Before 5 April 2024
As the end of the tax year approaches on 5 April 2024, it's an ideal opportunity to assess and leverage various allowances and reliefs available to enhance your tax profile. Learn key planning strategies.
Year-End Tax Planning: Strategies to Consider Before 5 April 2024
Planning Strategies to Consider Before 5 April 2024
Have you recently evaluated your personal tax situation? Is your tax structure optimised for efficiency? As we approach the end of the tax year on 5 April 2024, it presents an ideal opportunity to assess and leverage the various allowances and reliefs available to enhance your tax profile. Allocating time for this review can provide valuable insight into potential opportunities for you and your family.
The vast scope and complexity of the UK tax system may seem daunting. However, navigating it with careful planning can lead to significant financial benefits. Understanding your tax affairs is key to maximising your wealth and ensuring your financial future. Future legislation could result in changes to tax law, which may require adjustments to your plans.
Take Advantage of Potential Reliefs or Allowances
The tax landscape has witnessed considerable changes, making the situation more challenging for taxpayers and investors alike. As we near the end of the 2023/24 tax year, every taxpayer should understand the importance of this date and consider their tax position.
Furthermore, 5 April 2024 marks the end of your personal earnings year. Knowing your yearly income will help you understand your tax band and ensure you take advantage of potential reliefs or allowances. The current tax year officially ends on 5 April 2024. The following day, 6 April 2024, ushers in the 2024/25 tax year.
Marriage Allowance
This allowance provides a unique opportunity for couples where one partner is a basic rate taxpayer, and the other partner's income falls below the personal allowance threshold. With the Marriage Allowance, you can transfer up to £1,260, which equates to 10% of the personal allowance from the lower-income partner to the higher-income partner. Those with some income but who are non-taxpayers due to other allowances/bands (such as PSA or starting rate band) can also benefit, but they must be non-taxpayers.
This transfer can significantly reduce the tax liability for the basic rate taxpayer, potentially saving up to £252 in the current year. It's important to note that this allowance is specifically designed for married couples or registered civil partners. By efficiently utilising this allowance, couples can optimise their combined tax liabilities and make the most of their financial situation. You can backdate up to four years if you were eligible in those years; the earliest of the four years (for example, at the time of writing 2019/20) must be applied for before the tax year-end.
Employee Tax Reliefs
In the course of your employment, there are several tax reliefs you may be eligible to claim. These provisions are designed to offer financial respite for certain expenses related to your job. One such relief is for professional subscriptions. If you must maintain membership in a professional body as part of your job, you can claim tax relief on these fees.
Another provision is the 'working from home' allowance. This relief is aimed at employees who incur additional costs due to working from home. It's designed to alleviate some financial pressure from maintaining a home office.
Individual Savings Account (ISA) Allowance
You receive an ISA allowance of £20,000 in the current tax year. Contributions can be allocated to a Cash ISA, Stocks & Shares ISA, Lifetime ISA or Innovative Finance ISA. ISAs are a 'tax-efficient wrapper' which can make your investments grow more effectively than if you held them outside of an ISA. ISA investments grow free from Capital Gains Tax (CGT) (unless your investments are held in a tax haven), and no tax is payable on interest earned. (The use of tax-efficient wrappers like Individual Savings Accounts is based on current legislation and may be subject to change; the value of tax benefits depends on individual circumstances.)
Junior ISA (JISA)
If you have children, you can save up to £9,000 in a JISA in the 2023/24 tax year, however, they cannot access it until they reach 18, although the investments can be managed on their behalf. A child can only have one JISA (Cash and/or Stocks & Shares) at a time.
Anyone with parental responsibility for a child can open a JISA for them, as long as the child is under 18 and lives in the UK. Once a parent or guardian has opened the account, anyone can pay into it, including grandparents, other family members and friends, as long as the total amount does not exceed the annual limit. Someone transferring a Child Trust Fund (CTF) must transfer the CTF funds to a JISA and close the CTF to be able to fund a JISA.
The Lifetime ISA
A Lifetime ISA (LISA) applies to individuals aged 18 to 40 who are either planning to buy their first property or saving for later life. The Government will add a 25% bonus to the amount you put into the ISA up to the maximum limit of £4,000 each tax year until the age of 50. This means for every £100 you save, the government will add an extra £25. If you put in £4,000 you will end up with £5,000.
For lifetime ISAs specifically designed to fund the purchase of a first property, there are certain limitations. The property value must not exceed £450,000. Funds not used for a first house purchase become accessible without penalties only at age 60. Early withdrawals incur a 25% penalty on the withdrawn amount, affecting both the government bonus and some of your own money.
Pension Annual Allowance
Make use of your pension allowance to save tax. The Annual Allowance (AA) is the amount of money you can contribute to your pension over a tax year whilst receiving tax relief. For the tax year 2023/24, the standard AA is £60,000. Your AA also applies to contributions made to your pension by other people, such as your employer. You may still be able to contribute more than your AA by carrying forward unused AA from the previous three tax years.
When making pension contributions yourself, the general rule is that you will receive tax relief at your highest marginal rate of Income Tax. For funds contributed directly into your pension by your employer, those payments are made before any tax is deducted, meaning you automatically receive tax relief at your highest marginal rate of Income Tax.
Gift Allowance
Take advantage of your gift allowance to save on Inheritance Tax (IHT). IHT applies when you make a gift either during your lifetime or, more commonly, by Will, which is above the Nil Rate Band, which is set at £325,000. If the value of your estate is above this figure, 40% tax may be deducted from the excess. The good news is that there are many exemptions and planning approaches to help minimise the impact of these taxes.
For example, under the annual gift exemption, you can give up to £3,000 away each tax year IHT-free. You can give up to £250 to as many people as you like and there are other larger exemptions available, including donating a portion of your income, specific rules around wedding presents and making gifts to charity or political parties.
Capital Gains Tax
Use your Capital Gains Tax (CGT) allowance to save tax. CGT is a form of tax payable when you sell an asset, such as a second property, shares (which aren't held in an ISA) or a business, for a profit. Profits made from these disposals are subject to CGT, although the rate of tax is different depending on what type of asset you are selling and your marginal rate of Income Tax. The annual CGT allowance is currently (for the 2023/24 tax year) £3,000 for Individuals and £1,500 for most Trustees.
Your tax adviser will be able to explain how you can maximise your allowances and deferrals. You may be able to reduce your tax bill by using your spouse/ registered civil partner's Annual Exempt Amount (for CGT) and your personal allowance (for Income Tax). You may also be eligible for certain reliefs from both CGT and Income Tax, which could bring your tax liability down. For example, CGT liability on the sale of businesses or shares in companies can benefit from Business Asset Disposal Relief or Investors' Relief.
Dividend Allowance
The dividend allowance was introduced in 2016 and replaced the previous dividend system where UK taxpayers had an effective 10% tax credit applied to their dividend income.
You don't pay Income Tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). In addition, you get a dividend allowance each year, which for 2023/24 is £1,000 (£500 from 6 April 2024). You only pay tax on any amount received over this. This is irrespective of which Income Tax band your income would normally fall into. Dividends that fall within your Personal Allowance don't count towards your dividend allowance – so you can have an amount of them tax-free in a higher tax bracket.
Conclusion
As the tax year end approaches, taking time to review your financial position and implementing appropriate tax planning strategies can lead to significant savings and enhanced financial well-being. By maximising available allowances, understanding recent tax changes, and strategically timing financial decisions, you can optimise your tax position and work toward your long-term financial goals.
Remember, tax planning should be an ongoing process, not just a year-end activity. Regular reviews and adjustments to your financial strategy, ideally with professional guidance, can help ensure you're making the most of available opportunities while remaining compliant with tax regulations.