Tax Year-End Preparation - What You Need To Know

As we approach the end of the calendar year, many of you will be thinking; surely it is too early to look at the tax year end. While many of us leave it to the last minute, admittedly, it can be helpful if circumstances change, but you don't need to leave it to the last days of the tax year to do your preparation. This can save on any last-minute stress and also reduce the chance of missing out on some of those essential allowances.

This article is effectively a checklist of your tax year-end preparation , and while you will have seen many of the topics before, it does no harm to be reminded of the headline topics and the details. As you know, many tax benefits available today are on a strict "use it or lose it" basis. Don't miss out!

Income tax

When it comes to income tax, as the majority of us are paying via the PAYE system, tax and national insurance are deducted at source. However, in recent years, there has been an increase in clients with additional income outside of their regular employment. Unless this is also taxed at source, you must declare this to HMRC as part of your self-assessment form. While the self-assessment form/additional tax payments are not due until the following January, preparing now and reporting early makes your life less complicated.

Capital gains tax

Over the years, we have become accustomed to tax relief and tax allowances rising in line with inflation. So, the recent announcement by the Chancellor of the Exchequer, Jeremy Hunt, that the capital gains allowance would be reduced from ￡12,300 to ￡6000 for the current tax year surprised many people. It is even more crucial that you use your capital against allowance where possible because there was further bad news; it will fall to ￡3000 a year from April 2024!

As spouse/civil partner asset transfers are free of taxation, you can also use your partner's allowance to give you a combined capital gains tax allowance of ￡12,000 for the current tax year. This is a simple but effective means of negating or reducing your capital gains tax liability. Depending on your circumstances, it may be useful to consider a Bed & ISA, selling shares in your own name to crystallise a gain (using your allowance) and repurchasing within your tax-free ISA.

If your capital gains are more than your allowance, the excess profits will be charged at the following rates:-

• Basic rate taxpayer - 10% on gains, 18% on residential property
• Higher rate taxpayer - 20% on gains, 28% on residential property

Any gains above and beyond your capital gains tax allowance must be reported to HMRC using a self-assessment form.

Dividend/savings income allowance

In line with the reduction in the capital gains allowance, the Chancellor also reduced the dividend income allowance from ￡2000 in the 2022/23 tax year to ￡1000 in the current tax, falling to ￡500 from April 2024. Dividend income above your annual allowances is charged at the following rates:-

• Basic rate taxpayers, 8.75%
• Higher rate taxpayers, 33.75%
• Additional rate taxpayers, 39.35%

You will need to add additional dividend income onto your self-assessment tax return and pay the relevant tax.

There is also a savings income (i.e. interest) allowance of ￡1000 for basic rate taxpayers and ￡500 for higher rate taxpayers. You may be eligible for the starting rate for savings (if you earn less than ￡17,570 per annum), which, depending on your situation, means you could earn up to ￡5000 of interest without paying any additional tax. All taxable interest (ISA and pension fund interest is not taxable) will be charged at your income tax rate and, usually, automatically collected by HMRC.

ISA allowance

While there was speculation that the Chancellor would reduce the ISA allowance , so far, it has been retained at ￡20,000 per annum. This is the figure which you can contribute annually, split between various types of ISA plans, all of which are shielded from capital gains, income and interest tax. You can use spouse/partner asset/fund transfers to maximise ISA allowances, helping to build up a useful tax-free portfolio of investments.

ISAs replaced the previous Person Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). At the moment, there is circa ￡700 billion held in ISA plans, which proves their popularity.

Pension contributions

On 6 April 2023, the pension annual allowance increased (from ￡40,000) to ￡60,000, or 100% of your qualifying earnings, whichever is the lower. In theory, there is no limit to the contributions you can make to your pension scheme, but the allowance is the level at which your pension contributions will receive tax relief from the government. Any excess annual pension contributions would be added to your taxable income and taxed accordingly, either 20%, 40% or 45%. For those earning over ￡240,000 a year, the allowance is reduced by 1 pound for every 2 pounds of excess adjusted income.

Unlike most tax reliefs, which are available on a "use it or lose it" basis, you can carry forward any unused pension allowance from the previous three tax years - if you were a member of a pension scheme during that time.

Gift allowances

While it is essential to plan for inheritance tax, many people fail to fully utilise the various gift allowances available. These include:-

• Annual exemption, which allows you to gift ￡3000 each year without inheritance tax consequences. This is ￡6000 per year for a couple, and any unused exemption from the previous year can be carried forward.
• You can pay ￡9000 a year into a (junior) JISA with the funds available to them when they turn 18.
• You can also pay ￡2880 annually (gross ￡3600) into a junior SIPP without tax liabilities.
• There is a small gift allowance of ￡250 a year (per giftee), which you can give to as many family members as you wish, free of tax.
• Gifts for weddings/civil partnerships, ￡5000 to your child, ￡2000 to a grandchild/great-grandchild and ￡1000 to any other person.
• There are also Potentially Exempt Transfers (PETs) concerning inheritance tax, but these can be relatively complex, and advice should be taken.

In isolation, many of these gift allowances seem relatively minor, but the cumulative annual long-term impact can be significant, helping to reduce your short, medium and long-term tax liabilities.

It's essential to take advice

As you can see above, there are many different factors to take into consideration which can impact your annual tax liabilities. No two client scenarios are the same; therefore, it is vital to take advice as early as possible to prepare for the future. If you have any questions or queries or would like to review your finances in more detail, please contact me .