The British Tax Year
The ancient Babylonian new year began in spring, following the agricultural year. In Tudor times, the business year also began in spring. This business year was divided by 4 quarter days, a tradition which persists today in many commercial lettings payable quarterly on the 25th day of the month. The tax and business new year's day was originally on the 25 March quarter day (Lady Day).
When Britain adopted the Gregorian calendar in 1752, this date had to shift by 11 days, the difference in the date between the old Julian calendar and new Gregorian one, to avoid short changing tax payers. It was shifted by a further day in 1800 for the same reason, which brings us to the present eccentrically British arrangement: the tax year ends on 5 April, and the next one begins on 6 April.
In advance of the end of the tax year, here is a checklist of suggested steps to optimise your tax position.
Calculating your income in the year
The first step is to calculate what your total income in the tax year from 6 April 2022 to 5 April 2023 is predicted to be. This year, with high interest rates, there may be more interest income than in prior years. Other taxable income can come from employments, self employments, dividends, property, trust distributions, state pensions and certain benefits, and private pensions.
Key cliff edges
A feature of the UK tax system is particular thresholds at which tax rates or other entitlements become markedly worse for the tax payer: -
£50,270
basic rate tax band ends. Income above this level is taxed at much higher rates. Earned and savings income are taxed at 40% rather than 20%, and dividends are taxed at 33.75% rather than 8.75%.
Higher Income Benefit Charge applies - 1% of all child benefit is withdrawn for each £100 earned, so at income of £60,000, all child benefit entitlement is lost.
Savings allowance reduced from £1,000 to £500.
Conversely national insurance rates are much lower for income over this threshold.
£100,000.
Tax free personal allowance is withdrawn by £1 for every £2 earnings above this, so the effective tax rate is 60% for savings and earned income.
Entitlement to 15 hours tax free childcare for 3 and 4 year olds is withdrawn abruptly.
These thresholds can be adjusted as set out below.
Pension contributions
Generally, the most powerful tool in the tax planning toolkit is to make pension contributions into a self invested private pension (SIPP). For every £8 invested into a SIPP, the thresholds shift by £10. If you invested £8,000 in a SIPP before the tax year end, you would increase the basic rate cliff edge up from £50,270 to £60,270.
It must be noted that while pension contributions are effective at reducing the tax rate, they will always cost more in short term cash then it will save in tax.
There is a limit on the amount of pension contributions, particularly for those who have already accessed their pension pots and exceeding this limit can be extremely deleterious - please do get in touch if you are concerned.
It it also worth noting that it is better for owner manager companies to make contributions to pension schemes on behalf of owners rather than the owner drawing the money as taxable earnings and making a contribution.
Gift Aid
Gift aid contributions have the same effect as pension contributions in adjusting tax cliff edges.
Annual Allowances
In general it is more tax efficient to earn money evenly over time rather than have low earnings in one tax year and high earnings in the subsequent year which will fall into higher tax brackets. It is worth considering whether the following allowances have been fully used: -
Tax free personal allowance: £12,570. Withdrawn progressively for income over £100,000.
Savings interest allowance: £1,000 basic rate tax payers, £500 for higher rate payers. There is a more generous allowance for the very lowest earners.
Dividend allowance: £1,000.
Capital gains annual exempt amount: £6,000.
Basic rate band: £37,700.
Property income allowance: £1,000.
Trading allowance: £1,000.
Get in touch
Please do not hesitate to get in touch if you would like a more detailed chat about any of the suggestions in this blog post.