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Personal tax planning

Understanding the system and taking proactive steps to minimise liabilities

Our hard-earned money is precious to us, and understandably, no one relishes the thought of parting with it in the form of taxes. Yet, the complexities of the UK tax system often escape the understanding of many. As we've stepped into the current tax year starting from 6th April 2023, time is of the essence. Leveraging all available tax reliefs and allowances before 5th April 2024 is vital to minimise potential liabilities.

Personal tax planning should be at the forefront of your priorities as the end of the current tax year is fast approaching. Proactive measures taken now could allow you to capitalise on any remaining reliefs, allowances, and exemptions.

Planning opportunities to consider

Navigating the complexities of the tax system can be challenging. Still, with careful planning and timely action, you can ensure you're making the most of the allowances and reliefs available to you. Remember, the key to successful personal tax planning is understanding the system and taking proactive steps to minimise liabilities.

Simultaneously, it's worth pondering over any planning opportunities that may need your attention for this tax year or securing your long-term future. We have identified some areas of planning that are worth considering for inclusion in your 2023/24 tax health check to-do list.

Take advantage of potential reliefs or allowances

However, 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, April 5, 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 April 5, 2024. The following day, April 6, 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.

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.

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. You may also be entitled to claim relief for business miles travelled in your personal vehicle. If you use your own car for work-related travel, this relief can offer significant savings.

Salary Sacrifice

Salary sacrifice is a highly tax-efficient method for making pension contributions, saving money, and reducing your Income Tax and National Insurance obligations. This strategy involves exchanging part of your salary for payments into an approved share scheme or additional pension contributions. Contact us to explore the benefits if you are employed and haven't considered this.

Trading and Property Allowances

These allowances are aimed at individuals who earn small amounts of income from activities like selling items on eBay or Amazon or renting out spaces on Airbnb. Each of these allowances offers up to £1,000 of tax-free income.

Furthermore, if you rent out a portion of your home, you may be eligible for the rent-a-room relief. This relief allows you to receive up to £7,500tax-free from letting out a room in your home.

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 a big difference to your money over time. You can combine your ISA allowances for married couples, enabling you to put up to £40,000 in ISAs between you.

Investors who have yet to use up their full ISA allowance should discuss with us the potential to sell shares yielding dividends outside their ISA and buying them back within this tax-exempt wrapper. However, care should be taken as this could trigger a Capital Gains Tax charge.

Junior ISA (JISA) Allowance

In the same vein as the ISA suggestions, children are entitled to a Junior ISA (JISA) allowance of £9,000 per annum. Consider funding a JISA to give your children a nest egg when they turn 18.

The Lifetime ISA

A Lifetime ISA (LISA) applies to individuals aged 18 to 40 who are either planning to purchase their first home or preparing for retirement. With the ability to invest up to £4,000 annually, the government bolsters your efforts with a 25% bonus, up to a maximum of £1,000 per year. This money can be used to buy a new property (subject to certain restrictions) or accessed when you turn 60 to supplement your retirement income.

Pension Contributions

Pension contributions should be a key consideration at the end of each tax year. Contributions to pension schemes can be made on behalf of your minor and adult children and your grandchildren. There are several advantages to doing so. For example, the pension scheme can reclaim basic rate tax from HM Revenue & Customs (HMRC). You'll receive additional tax relief if you're subject to a higher tax rate exceeding 20%. You're establishing a pension fund for your retirement or to pass on to future generations.

In the current tax year of 2023/24, contribution limits have been augmented. The annual pension contribution limit is now the lesser of your relevant earnings or an annual allowance of £60,000 gross, corresponding to a net payment of £48,000.

All UK residents under the age of 75 can contribute up to £3,600 gross (£2,880 net) per year, irrespective of income level. However, suppose your adjusted income (typically your total taxable income plus employer pension contributions) exceeds £260,000. In that case, the annual allowance is progressively reduced by £1 for every £2 of income over this threshold, down to a minimum of £10,000 gross (£8,000 net) for those with an adjusted income above £360,000.

For individuals aged over 75, no tax relief is provided on contributions made. If you can make additional contributions, you can use any unused allowances carried forward from the previous three years. Reviewing your pension status and that of your family members is crucial for effective financial planning.

'Carry Forward' Rules

The 'Carry Forward' rules allow you to carry forward unused allowances from the previous three tax years. As we reach this tax year end, you'll lose any unused allowance for the 2020/21 tax year if it remains untapped. Considering these rules when planning your pension contributions would be best.

Capital Gains Tax Allowance

In light of the changing landscape for Capital Gains Tax (CGT), it's essential to understand how you can optimise your financial strategy. Before 6 April 2024, you have an opportunity to solidify your capital gains and make the most of the annual CGT exemption, which is capped at £6,000. However, please note that this benefit is not extended to individuals who are taxed on a remittance basis with income and capital gains exceeding £2,000.

One effective method to crystallise capital gains involves strategically selling and repurchasing stocks and shares. This approach enables you to maximise the annual CGT exemption. It offers an opportunity to elevate the base cost for future sales, potentially reducing your tax liability in the long run.

However, knowing the timing and the party involved in the repurchase is crucial. To derive the maximum benefit from this strategy, the repurchase should ideally occur after a gap of more than 30 days. Alternatively, the buyback can be executed by your spouse, registered civil partner,or through an Individual Savings Account (ISA).

Dividend Allowance

For those with invested assets, the dividend allowance can offer substantial benefits. You can receive up to £1,000 per year tax-free, with dividend tax rates applied to amounts over £1,000. The dividend allowance will be reduced to £500 per annum in the 2024/2025 tax year.

Inheritance Tax Relief

Inheritance Tax is levied on the value of any estate above £325,000, or up to £1 million for married couples, including the residence Nil-Rate Band. However, certain business assets, such as shares in private trading companies and farmland, may qualify for 100% relief from Inheritance Tax. With the government freezing the Inheritance Tax thresholds until April 2028, it's crucial to consider if you're fully utilising the reliefs available to you.

Residence Nil-Rate Band (RNRB)

The Residence Nil-Rate Band (RNRB) is an allowance introduced during the 2017/18 tax year. It applies when a main residence is passed on death to a direct descendant. Currently, the allowance stands at £175,000. When combined with the nil-rate band of £325,000, this provides a total Inheritance Tax exemption of £500,000 per person or £1 million per married couple. If you plan to pass on your home to your children or grandchildren (including adopted, foster, and stepchildren), speak to us about claiming the RNRB.

Gifting for Estate Planning

Certain gifts are exempt from Inheritance Tax, immediately leaving your estate upon gifting. These are commonly referred to as exempt gifts and include gifts presented to your spouse or registered civil partner. Contributions to charities or political parties and gifts valued up to £250, provided each gift is given to a different recipient and is the only tax-exempt gift they've received from you within that tax year. This often encompasses birthday and Christmas gifts derived from your regular income.

Wedding gifts from a parent to their child up to £5,000, from grandparent to grandchild up to £2,500, or up to £1,000 to anyone else. Additionally, you're allocated an annual exemption each tax year, allowing you to gift cash or property up to the value of £3,000. This can be given to a single individual or divided among several recipients. If the previous year's exemption wasn't utilised, it can be carried forward to the current tax year, effectively doubling the exemption to £6,000. Understanding these exemptions can help in efficient tax planning and potentially reduce your inheritance tax liability.

Other Available Allowances

Your Personal Savings Allowance (PSA) refers to the amount of savings interest income/growth you can earn tax-free. Current levels are set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers, however, are not entitled to this allowance.

Future legislation could result in changes to tax law, which may require adjustments to your plans.


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