In our world, February doesn’t just mark the passing of the tax return filing deadline, but it is also a time when we start to think about the last-minute year-end tax planning that can be done before 5 April.
Most allowances and tax reliefs are given on a use-it-or-lose-it basis, so it is worth checking before the end of the tax year that you have made the most of the tax-saving opportunities available to you.
What should you do before the end of a tax year?
The majority of tax allowances and tax bands in the UK tax system apply for one tax year only, so if you don’t use them, they cannot be carried forward. Year-end tax planning needs to include strategies to make sure you have used any allowances available to you and, as far as possible, keep income levels under the next tax bracket.
For those who have control over their income, year-end tax planning could involve accelerating or delaying taking income, depending on the comparative available allowances and tax rates between this tax year and the next tax year. The same impact can be achieved by accelerating or delaying purchases that are allowable for tax purposes.
Employees generally have less control over their income, but can still achieve tax savings through decisions on paying pension contributions or buying tax-efficient investments, the timing of which can make a significant difference to the tax position.
Those running a business may have more year-end tax planning opportunities than most and should be considering not only their own tax position but also whether their spouse has allowances and reliefs that may not yet be used.
If you have profitable investments, it may be worth selling some before the end of the tax year to make use of the capital gains tax annual allowance, which currently covers £12,300 of capital gains but will be cut twice in the coming tax years.
Key dates to look out for
For historical reasons, the UK tax year ends on 5 April, so most income will need to be received by this date to fall into the current tax year. Payments will need to have been made by that date to be eligible for relief in this tax year.
If you are looking at adding to your pension pot or investments in tax favoured investments, such as enterprise investment schemes shares or venture capital trusts, you probably need to set the wheels in motion before the end of March as there will invariably be an “onboarding” process with these investments.
Whilst Income Tax relief for investments in enterprise investment schemes can be carried back to the previous tax year, pension contributions and venture capital trusts investments can only be relieved in the year in which the payment is made. It is, therefore, critical to have an understanding of your income position before investing.
If your income is only slightly into a higher tax bracket, it may not be too late to take action after 5 April, as you may be able to bring your income back below the threshold by making gift aid donations to charities before you submit your tax return. Gift Aid donations can be carried back to the previous tax year.
Get the most out of this year’s bonus
Many employers pay annual bonuses in March, so there will be a significant tax bill coming in the March payslip. However, for some workers, the story does not end there. If your basic salary is less than £100,000, but your bonus takes your income over that threshold, HMRC will demand more tax at a later date.
This is because any personal allowance that may have been given through the PAYE code will be restricted as a result of earning more than £100,000. Employees in this situation can find themselves being asked to submit self-assessment returns for the first time as HMRC look to recover the additional tax.
If your bonuses take your income over that £100,000 threshold regularly, you may want to talk to your employer about delaying the bonus. Whilst receiving the bonus a month later in April may mean that you end up with two bonus payments in one tax year, the potential tax saving from keeping your personal allowance can be up to £5,000.
Although the tax brackets change from April, meaning that you would pay 45% on a total income exceeding £125,000, it would still not wipe out the tax saving you would achieve by preserving your personal allowance.
As always, the devil is in the detail, and the advice of a professional can be very valuable. If you are a high-net-worth individual seeking tax advice, please call us to discuss your individual circumstances.
Check if there are any gaps in National Insurance contributions
We need to make a special mention this year about your National Insurance record.
National Insurance Contributions aren’t just another tax on your earnings; they do count towards benefits, including your State Pension entitlement. If you have gaps in your contributions record, it is worth considering topping up to make sure you earn your full pension when you get to retirement age.
Usually, you can only top up the last 6 tax years, but there has been an opportunity to go back to April 2006 in certain circumstances. This window is closing from 6 April 2023, so the earliest tax year you can top up going forwards is 2017/18.
If you think you may have gaps in your record and may not be able to achieve the 35 qualifying tax years that are currently required for the full basic pension, now is the time to check your NI record.
You can make voluntary contributions. These will cost £15.85 for each week you are topping up or £824 to top up a year for which you have no existing contributions. Whilst this may seem like a large sum to pay in, you can expect it to take less than 4 years to recover this initial investment when you start to receive your pension.
Thankfully HMRC has been busy digitising historical data so that most people can check their records online through a government gateway account. If you haven’t already created one, it is an easy process. You just need your National Insurance number, your passport and personal details.
Irrespective of whether you had periods where you were not working, it is also a good idea to check the record to make sure that it is complete. There have been instances where records were missed before payroll information was routinely submitted online, and it will be easier to fix the problem now than try to sort it out when you are ready to claim your pension.
Capital Gains Tax planning
If you have investments that have increased in value, using the Capital Gains Tax annual exemption can help to reduce your tax liabilities in the long term.
Also, bear in mind that if you have made a large capital gain in the tax year, this tax liability can be deferred, if not eliminated, by investing in Enterprise Investment Scheme (EIS) shares.
The markets have been undeniably volatile in the past year, so your investments may be showing a loss at this stage. Disposing of the investments that are currently worth less than you paid for them before the new tax year can be a useful tax planning tool, allowing you to carry forward a valuable relief to use in future.
Are you invested in ISAs?
ISAs (Individual Savings Accounts) are a special type of tax-efficient investment which are perhaps sometimes overlooked. Income in the fund is free from Income Tax, and capital gains are free from Capital Gains Tax.
To smaller investors, ISAs may not seem as attractive when compared to their tax-free dividend allowance and Capital Gains Tax relief. But with these reliefs being slashed from April 2023, it will make sense for more taxpayers to consider ISAs.
There is an annual limit on the amount that can be paid into an ISA. However, by sticking with the investment for the long haul and rolling up the income, our clients have built a substantial nest egg in a tax-free environment.
As with any other investment, we would recommend speaking to a professional investment adviser for help with choosing an ISA that is right for you.
Get tax planning advice from Butt Miller
This blog covers some of the more common year-end tax planning opportunities, but there may be other tax-saving strategies depending on your circumstances. At Butt Miller, we’re here to discuss your opportunities surrounding more tax advice, please get in touch.
Is it best to retire at the end of the tax year?
Tax planning is important as you look to stop working. If the circumstances of your retirement are flexible on timing, then it often makes sense to retire before the end of one tax year and start to receive your pension in the following tax year.
How do I know if I am overpaying National Insurance?
National Insurance behaves differently from Income Tax. Whilst Income Tax is calculated on the basis of your total income for the tax year, National Insurance applies to earnings from your job, pay period by pay period.
That means that although your total income for the year is less than the National Insurance threshold, you may have to pay contributions in one or more months of the year because your earnings for that particular period have exceeded the threshold for NIC in that one month, week, etc.
It is quite rare to overpay National Insurance, but it can happen if you have income from more than one employment or you are both employed and self-employed in the same tax year. National Insurance calculations are a complex area, so if you are concerned that you are overpaying, please contact us for advice.
Why is my bonus taxed so high?
The PAYE system is designed to give you allowances and tax bands evenly across the tax year. Whilst this gives a degree of certainty when your salary is also spread evenly over the year, this system can cause anomalies when you receive irregular payments such as bonuses.
A large one-off payment may mean that tax is taken at a higher rate than you might expect to pay based on your expected total income; however, any overpayment in one month should be gradually paid back to you over the remainder of the tax year.
If you do get to the end of the tax year and have overpaid tax, any overpayment will be dealt with through your Self-Assessment return. If you don’t submit self-assessment returns, HMRC does an annual reconciliation after the tax year-end and will issue a calculation.
What is Income Tax relief?
This is a term that is used to cover the allowances available to reduce an income tax liability. Tax reliefs include the personal allowance each individual is entitled to claim, the tax-free dividend allowance, investments in tax favoured investments and pension contributions.
Tax relief can be given through your PAYE code if you are an employee or may be claimed through a Self-Assessment tax return if you are required to submit one.
Tax planning opportunities arise all the time, but the tax year-end sharpens the focus on tax reliefs. Use it or lose it!
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