Tax planning in tricky times

We have recently seen significant pension changes including an increase in the pension allowance and lifetime allowance reform. We also have some other allowances being cut from April 2024 and many rate bands frozen. A pre 5 April review can help to identify any potential tax savings for you and your family.

The highest rate of tax is 45%, applying to individuals with total income over £125,140. Personal allowances are tapered for individuals with income between £100,000 and £125,140 (2023/24), giving an effective tax rate in this band of 60%.

You can reduce taxable income, which can be particularly tax efficient if you fall into this 60% effective rate band, by:

• making pension contributions or charitable gift aid donations;
• transferring income-generating assets between spouses/civil partners;
• using tax-free investments and/or tax efficient investments;
• investing in assets which generate capital growth rather than income; and
• altering the timing of income to maximise use of lower rate bands.

While by no means certain, there have been reports of a possible cut in income tax rates and consideration could therefore also be given to deferring income where this is within your control.

Pension contributions are still a really tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of your annual allowance and what is known as your net relevant earnings. You may also be able to take advantage of any unused annual allowance from the previous three tax years to make additional pension contributions. This is a complex area as pensions are subject to potential restrictions for higher earners, so you should take advice before making contributions and we can put you in touch with a specialist.

There is a risk of future changes to this reasonably generous relief, meaning it is worthwhile considering taking full advantage of the current allowances now.

If you pay tax at the 40% rate or higher, you may benefit from tax relief on gift aid donations you make to charity.

Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief.

Individuals can give quoted shares or an interest in land to a charity. This has the advantage of income tax relief being available on the market value of the asset as well as the disposal being exempt from capital gains tax.

Some individuals have a starting rate band of £5,000 for savings income, subject to the level of their total income, and £1,000 for dividend income in 2023/24. Savings and dividend income falling within these bands is taxed at 0%. Separately to the starting rate savings band, a personal savings allowance is available to basic and higher rate taxpayers but not to additional rate taxpayers. The allowance is £1,000 per year for basic rate taxpayers and £500 per year for higher rate taxpayers. Spouses and civil partners should review who holds any savings that generate taxable income to ensure these allowances and rate bands are utilised efficiently.

You should be aware though that the dividend allowance will halve to £500 from April 2024.

There are various tax-free and tax-efficient investments available, and our financial planning specialists can advise you on whether or not any of these investments are suitable for you.

You can consider making tax-free investments through ISAs or National Savings. The annual ISA subscription limit for 2023/24 is £20,000, and this limit cannot be carried forward if not used. You can also consider Junior ISAs for children under 18 (2023/24 limit £9,000). Normally, income arising on funds given to children by a parent remains taxable on that parent if over £100 a year. As ISA income is not taxable, this allows you to give cash to your children without having to pay tax on the income generated.

Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments may provide tax relief and the opportunity to defer capital gains. These investments are considered high risk, and there is a risk of further changes to the schemes.

As capital gains tax is charged when an asset is sold, you have some control over when to pay it. If you have unrealised gains, you may find it beneficial to sell enough assets each year to use your CGT annual exemption, which is £6,000 in 2023/24.

Crystallising unrealised losses to offset gains may also be an option. You can consider selling an asset which stands at a loss, or making a ‘negligible value’ claim on assets that currently have no value.

Assets can also be transferred between spouses free of tax, which can help to use up both spouses’ annual exemptions and any capital losses.

The capital gains tax annual exempt amount will halve to £3,000 from April 2024. You may therefore want to accelerate gains if you have unused allowance in the current tax year, as planning around the annual exempt amount will be more restrictive in future.

You should take tax and investment advice before making any substantial changes to your asset holdings.

Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years. This £3,000 annual allowance can only be brought forward for one tax year, so if you have assets to spare you may want to consider using up this and last year’s allowance before 5 April. The current year’s allowance is automatically used first. The annual allowance is per donor, not per recipient, so a married couple can make gifts independently. Rate bands and allowances for IHT are currently frozen.

All of the above, is, of course, subject to changes in the tax regime. While we would not expect further changes before 6 April 2024, with a General Election expected later in the year further tax changes are likely, given the current economic conditions, especially if there is a change in Government. These could potentially come into effect rapidly.

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