There are lots of ways that you can plan to reduce your tax bills, the best way to do so is to plan ahead. If you act fast enough, there are still ways to reduce your bill for 2022/23, however they need to be completed before 5 April 2023.
Below are some tips that can help you to with tax planning:
Think about making personal pension contributions or gift aid donations
Investing in a pension or making donations via gift aid are two efficient ways to save tax. The amount invested or donated can extend a taxpayer’s basic rate tax band, meaning more of their income is taxed at a lower rate than as standard for that tax year.
For individuals with taxable income over £125,140, not only does it mean that you pay less tax at 40%, it can also help to reinstate the personal allowance that you would have lost when your income exceeded £100,000 – meaning more tax free allowances.
For individuals with young children, pension contributions are deductible when calculating your total income for calculation of the high income child benefit charge (HICBC). Under the HICBC rules, if you or your partner’s adjusted net income exceeds £50,000 then some child benefit will be repayable, and if the adjusted net income exceeds £60,000 then all child benefit is repayable. Pension contributions are a great way to reduce the amount payable or even fully eradicate the need to pay anything back!
Things to be aware of:
Be careful when making pension contributions, as there is a maximum (annual allowance) that you can save into your pension pot in a tax year. For most people under the age of 75, the annual allowance is set at £40,000 or 100% of your earnings, whichever is lower. Contributions up to this limit are boosted by tax relief – for every 80p paid into a pension, the government adds 20p in tax relief. Higher and additional rate taxpayers can claim an additional 20p and 25p respectively via their annual tax return.
Do note that if you have an adjusted annual income (salary, benefits, interest, dividends, rental income plus contributions to your pension) of more than £240,000 the annual allowance can fall from £40,000 to as low as £4,000. Contributions made that are above your personal annual allowance can lead to a tax charge.
Something else to keep in mind when making contributions is that if you haven’t maximised contributions in the previous three tax years you can carry forward your unused pension annual allowance; these carry forward allowances can total up to £120,000 which can also qualify for tax relief!
Before making significant pension contributions please ensure that you seek professional advice as there are strict rules as to the amount you can pay into your pension scheme.
If you are interested in making pension contributions you can always speak to your main contact at Friend & Grant who can look at how much you can pay and put you in touch with a pension advisor if necessary.
Plan your capital gains
Every individual has a capital gains tax free allowance. The allowance applies to each tax year, and as with the personal allowance, if this allowance goes unused it cannot be carried forward. The current annual allowance in 2022/23 is £12,300, however it was announced in the Chancellor’s Autumn Statement that this tax-free allowance would be reducing from 6 April 2023 to £6,000 and then halving to £3,000 from April 2024.
Now more than ever planning when to sell your capital assets can help you save tax. It is probably too late to try and sell an asset such as a property, however if you have other assets that you were considering selling, such as shares or valuable items, it may be worth selling them now before the tax-free allowance drops!
Things to be aware of:
However, be careful not to sell all your assets in one go, remember just because the allowance is dropping, doesn’t mean there isn’t going to be any tax-free allowance in future years! Planning the timing of sales is crucial to ensuring you benefit from maximising the use of your allowances.
Invest in the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
The EIS and SEIS schemes are both part of a series of tax reliefs launched to try to encourage investment into small unlisted companies that are carrying on a qualifying trade.
If you purchase shares in a business that qualifies for EIS, you can benefit from generous tax reliefs. The primary incentive to invest is the income tax relief you receive upon investing, investors can claim up to 30% income tax relief on an EIS investment. The maximum you can invest in a single tax year is £1 million, so this could amount to up to £300,000 of tax relief!
Tax relief on investments into SEIS qualifying companies work similarly to relief on EIS investments. However, the difference is that an individual can invest up to £100,000 per tax year and receive a 50% tax reducer in return, amounting up to £500,000 of tax relief!
Income tax relief on EIS and SEIS investments act as a tax reducer and can be carried back to the previous tax year if this is more beneficial, provided the limit for that year has not been exceeded.
Another great thing about investing into EIS/SEIS is that if shares are sold after 3 years, then any gains made on the sale are exempt from capital gains tax.
Things to be aware of:
Be careful, gains will not be exempt from capital gains and income tax relief for investment in EIS and SEIS companies can be withdrawn if you sell the shares within three years of purchase.
Ensure you utilise all of your allowances
Ensuring you’re utilising all of your tax free allowances is another great way to keep your tax bill as low as possible without getting in trouble with the tax man. We look at this in depth in our Tax Free Allowances blog.
If you would like to find out more about tax relief options and tax planning, please contact Sophie Purdue by email or call 01634 731390.
The content in this blog is correct as at 22/02/2023. See terms and conditions.
If you would like to find out more about some of our services that might help you please take a look at our related pages:
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Take a look at our other blogs on the topic of saving tax:
Tax Free Allowances – Are you using yours?
Love and Taxes – A match made in Heaven?