Date
29 Sep 2023Category
Tax, Private Client ServicesIt is human nature to put things off and deal with them at a later date, and tax planning is no exception. We focus so much on the annual compliance cycle which completes each year on 31 January, leaving February and March to consider planning before the end of the relevant tax year.
So, why not break old habits and think about planning earlier in the tax year. Here are a few things you can consider sooner rather than later.
The current tax year is the first one in which the highest rate of tax (47% in Scotland and 45% in the rest of the UK) is going to apply to income above £125,140. Up until April this year the highest rate of tax applied to income over £150,000 so the drop in the threshold could see quite a bit of income being exposed to those higher tax rates. That, coupled with the loss of any personal allowance where an individual’s income is over £125,140, can often produce surprising tax bills.
One way to try and take some of this income out of those higher tax brackets is to ensure that spouses or civil partners are using all of their available tax brackets. If, for example, one spouse is not using all of their basic rate tax bands, it is worth considering whether assets could be transferred to them to generate income which can then be taxed at the lower rate. This is particularly true given that we currently have a dividend allowance of £1,000, dropping to £500 from April 2024, so if dividends can be paid to basic rate taxpayers anything over those allowances will be taxed at 8.75% rather than the top rate of 39.35%.
There are no capital gains tax or inheritance tax implications for UK domiciled spouses and civil partners transferring assets between them.
This year we have an annual capital gains tax (CGT) exemption of £6,000, which is already a considerable reduction from last year’s allowance of £12,300. In addition, this allowance will drop to only £3,000 from April 2024. It is worth, therefore, considering disposals which will ensure the full CGT allowance can be used in this year. Any gains in excess of the allowance will be taxed at 10% if they fall within the basic rate band, or 20% thereafter, the exception being residential property gains which attract tax of either 18% or 28%. Again, assets can be transferred between spouses and civil partners without any CGT consequences, but can then be sold by the spouse who perhaps has losses available, or a full CGT annual exemption.
The current tax year has seen a significant rise in the pension annual allowance from £40,000 to £60,000. This gives taxpayers an opportunity to contribute more to their pension pot without incurring a tax charge, and indeed without the worry of the lifetime pension allowance at least for just now, this provides a fantastic window in which to bolster the pension fund for the future. Pension contributions can be made in a number of ways – personal pension contributions, salary sacrifice and employer contributions all being possible.
Make sure you use things like your Individual Savings Allowance (ISA) for the year. This provides the ability to contribute £20,000 to an ISA with any future income and gains arising within an exempt tax wrapper. ISAs also provide flexibility to access the funds, whereas a pension fund can only be accessed once an individual reaches 55 or on the grounds of ill health.
Many of our client conversations focus on inheritance tax planning and how to pass on wealth efficiently to the next generation. There are many exemptions available during a person’s lifetime to enable them to make gifts which will be immediately outside the individual’s IHT estate. These include:
Annual IHT exemption – set at £3,000, gifts of this level can be made to anyone each tax year. If the previous year’s allowance is unused, this can be carried forward, allowing a gift of £6,000 in the next tax year. It cannot be carried forward any further.
Small gifts exemption – gifts of up to £250 per individual can be made to as many individuals as you like in the tax year. Great for covering birthday and Christmas presents!
Gifts on the occasion of marriage – give the happy couple a great start to their marriage. A parent may gift up to £5,000, with an exemption of £2,500 for gifts by a grandparent and £1,000 for a gift by anyone else.
Normal expenditure out of income – a really useful exemption to cover habitual gifts, provided it can be demonstrated that the individual has surplus income each year and has not had to use any of their capital to maintain their standard of living.
These are just a few examples of the sort of planning that can be undertaken. There are many other areas that can be considered depending on the circumstances, so do get in touch with a member of our specialist team or your usual Azets advisor to explore these further.
