Planning ahead to protect you and your family's financial future
It is only natural to want to make sure that, whatever the future may bring, your finances are in the best possible position. Early, effective and efficient tax planning is a key step in achieving this, ensuring that you can mitigate your tax exposure, optimise tax saving opportunities and maximise your wealth.
The key is to plan ahead, rather than waiting until the end of the financial year. Our tax experts have put together this guide, to help you identify tax planning options to consider ahead of 5 April 2024.
This year, with rising prices, increasing interest rates, ongoing geopolitical upheaval, and a potential recession looming, it will perhaps be more important than ever to make the most of your annual allowances and tax reliefs.
Tax planning considerations
1. Double check if you need to file a personal tax return
Even if you do not usually file a tax return, it is worth double checking whether you will need to for the current tax year to 5 April 2024. Whilst interest rates and costs of living have increased over the year, many allowances and filing thresholds have remained the same, bringing more people over those thresholds.
2. Look at ways to reduce your income tax
The Chancellor of the Exchequer has made several announcements concerning rates and allowances applying from 6 April 2024, including the continued freezing of several key tax thresholds and reductions in the amount of annual exempt dividends and capital gains each taxpayer is allowed. To avoid losing out, it is important to consider how to make the most of the allowances you do have, including the very valuable ISA allowances available.
Ways to do this might include timing income, charitable gifts or pension contributions to happen either before or after the end of the current tax year. The opportunities available will very much depend on your circumstances.
3. Maximising your income tax allowances
The impact frozen allowances might have on your overall tax bill has been widely discussed in the media this year. Maximising these allowances is still a key tool when it comes to saving tax.
The personal allowance of £12,570 is the amount most individuals can receive before paying income tax, and is due to be frozen at this level until April 2028. The personal allowance is reduced by £1 for every £2 of net income over £100,000, so income between £100,001 and £125,140 is effectively subject to an income tax rate that can rise to 60%.
There are actions that can be taken before 5 April 2024 to adjust your net income to preserve some or all of this valuable allowance, depending on your circumstances.
Individuals are also entitled to a Personal Savings Allowance of £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. The dividend allowance has been cut to just £500 per annum from 6 April 2024.
If you just have a small amount of casual trading or property income, up to £1,000 of this may be exempted from tax.
4. Maximise ISAs and Junior ISAs
The ISA tax-free allowance is still £20,000 this year. No tax is due on interest on cash in an ISA, or on income or capital gains from investments in an ISA. This usually makes cash or stocks and shares ISAs a highly tax efficient investment option. Independent financial advice should be sought to see whether this is the right option for you,
It is also possible to open a Junior ISA for a child or grandchild and save up to £9,000 tax free.
5. Take advantage of your pension allowance
The annual tax-free pension allowance for most taxpayers was increased to £60,000 per year from April 2023. The allowance includes your contributions and those of your employer. Tax relief on pension contributions is at the highest rate of income tax you pay, so higher and additional rate taxpayers will see greater tax savings on the amounts they invest in their pension.
Taxpayers with income over £260,000 will see their annual allowance tapered down by £1 for every £2 they exceed this limit, subject to a minimum allowance of £10,000 per year. Those who do not fully utilise their £60,000 allowance by 6 April 2024 can carry forward any 'unused relief' from the previous three years in most cases.
Where planning for retirement, this could make a large one-off pension contribution an attractive and tax efficient option.
6. The benefits of Gift Aid donations
Gift Aid on charitable donations lets a charity claim an extra 25p for every £1 you donate. Higher or additional rate taxpayers can also claim tax relief personally: at a rate of 20% for higher rate taxpayers or 25% for additional rate taxpayers.
If you do not pay much income tax however, care should be taken when making Gift Aid donations. The amount of income tax you pay for the year must be sufficient to fund the 25p in the pound being claimed back by the charity. If there is a shortfall, you may have to make a top-up payment to HMRC at the end of the year to fund this.
7. Gifting or transferring assets
Capital assets like stocks, shares and land and property can be transferred between spouses without triggering a capital gains tax liability. Couples where one partner has a high income and the other has unused allowances can take advantage of this to reduce the effective rate of tax on their joint income.
Care and advice should still be taken where considering such a transfer.
8. The High Income Child Benefit Charge
The High Income Child Benefit Charge is paid to claw back Child Benefit payments where the recipient or their partner have an individual income that is over £50,000. Whoever has the higher income is responsible for the charge, which is made at a rate of 1% of the Child Benefit received for every £100 of income in excess of the £50,000 threshold.
Couples affected by this might consider their options for gifts or transfers of assets to ensure the split of their joint income takes this charge into account.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
