After a tumultuous 12 months with 3 prime ministers, 2 monarchs, widespread public sector strikes, a jump in interest rates, and most recently a run on a bank, the 2022/2023 financial year is drawing to what seems like a merciful close.
There are signs of improvement in the wider economy, with UK government borrowing better than forecast, and the UK Gross Domestic Product back in growth in January 2023 after several months of decline. I do hope 23/24 will be a happy and prosperous new tax year for us all.
At this time I would recommend personal tax clients take a few hours this month to review their tax position this year:
Estimate your total income this tax year
This is the crucial first step. Add together your pension, employment, dividend, and interest income in the tax year ending 5 April 2023, and you will be well placed to begin your tax planning.
Child benefit
If you or your household are in receipt of child benefit, keeping your adjusted net income below £60,000 could be very beneficial in helping you keep as much of your child benefit claimed as possible.
Gift aid contributions to charity and post tax pension contributions (see below) reduce your adjusted net income by £10 for each £8 you contribute.
The high tax £100,000 - £125,000 band
If your adjusted net income falls into the £100,000 to £125,000 band, the tax free personal allowance is progressively withdrawn. This means your marginal rate of tax is well over 50%. Pensions or gift aid contributions are an effective means of reducing your exposure by reducing your adjusted net income.
Pensions
In my tax checklist last year I covered this in detail, and nothing material has changed this tax year.
Be mindful of the annual limit on contributions. Rumours have it that the Chancellor Jeremy Hunt, who, in his previous work as Health Secretary had to contend with the impact of pension taxation on highly pensioned public sector healthcare workers, is looking to reform pension taxation in his upcoming budget for the next tax year.
It remains the case that it is more tax efficient to make pension payments directly from employer (company) contributions and claim a deduction for corporation tax, rather than to draw the money, incur an income tax charge, and then contribute it to a pension. This will be even more important next tax year (see below).
Dividends
Unless your income is in the £50,000 - £60,000 bracket sensitive to the Child Benefit Charge; or the £100,000 to £125,000 bracket in which the tax free personal allowance is used up, it is likely worth drawing at least £2,000 of dividends, corresponding to the dividend allowance, this tax year, from your company.
Interest
As interest rates have risen, returns available to savers are starting to pick up, and savings allowances are now becoming important to tax planning. Those with income of less than £17,570 benefit from a 0% savers starting rate on up to the first £5,000 of interest. There is a further personal savings allowance of £1,000 for basic rate tax payers and £500 or higher rate tax payers. Unfortunately advanced rate tax payers with income over £150,000 do not get any allowance at all.
Mortgage Interest on Let Residential Properties
Higher and advanced rate landlords receive only limited relief on their mortgage interest payments. At a time of rising interest rates, and with uncertainty as to the medium term prospects of many local housing markets, it may be a sensible strategy to pay down the capital balance outstanding on a mortgage as the fixed term comes to an end.
ISA allowance
ISAs provide an opportunity to invest tax free up to the annual maximum of £20,000. Very generally I would recommend higher or advanced rate tax payers below pension age to contribute into a pension before contributing into an ISA as the tax benefits of a pension are typically more generous than those of an ISA.
Next year
Subject to the new budget, corporation tax rates for more profitable companies are set to rise substantially to 25%. This makes remuneration through salary rather than through dividend a more attractive proposition, albeit that salaries will always attract national insurances but dividends will not.
The 130% super deduction regime is coming to a close on 31 March 2023 on the purchase of new capital items. This is more or less offset by the increase in corporation tax rates which makes a 100% annual investment allowance deductions more valuable in saving tax. I would therefore not specifically recommend holding off on the new laptop until the new tax year or hurrying up such a purchase.
If you have any queries do get in touch at hello@1gaccounts.uk
Comments