Year end tax planning 2023/24

How can Lambert Chapman LLP help you with tax planning in the next few weeks to ensure that you are maximising your position for the year-end and coming year?

As the current tax year is heading to a close, at Lambert Chapman LLP, we like to consider the upcoming changes and what you can do to impact your tax position.  Included below are some points that may be relevant for you, your family and your business.

Loss of the Personal Allowance

Where an individual’s income exceeds £100,000 per year, the personal allowance is reduced by £1 for every £2 of net income over £100,000.

We have noticed that for some individuals who have received pay rises during the year, the personal allowance has not been correctly adjusted in the tax code.  HMRC are supposed to adjust the tax code on a ‘real time’ basis, however sometimes they don’t which can lead to an unwanted tax bill where HMRC seek to recover the tax at the year-end.

For example, if your income went from £100,000 to more than £125,140, you would lose your full personal allowance of £12,570, meaning that an additional £5,028 of tax would be due.

The loss of the personal allowance means that you have an effective tax rate of 60% for income between £100,000 and £125,140 and income of more than £125,140 will be taxed at 45%.

If you have received or are expecting a pay rise that will take your income above £100,000, you should contact HMRC or us to ensure that your tax code is updated to reduce the underpayment of tax.

 

Reducing taxable income

There are significant advantages in reducing taxable income. It may prevent the top slice of income from falling into the top tax bands, as indicated above.

Taxable income can be reduced by moving investments into non-taxable investments, contributing into a pension or giving to a charity. Where possible, income can also be deferred into another tax year or assets that give income can be given to a spouse or civil partner that incurs a lower tax charge.

Trading losses from self-employment income can be set off against other income earned in the same year. Losses in the first four years of the business can be carried back up to three tax years.

Reducing income (through increased pension payments, charitable donations or other measures) is also beneficial to retaining Child Benefits. Child Benefits are clawed back at 1% of the benefit for every £200 of income over £60,000. If both parents keep their income below £60,000, the Child Benefit will not be clawed back.

 

Pension Contributions

The standard annual allowance for pensions is £60,000 plus any unused relief brought forward from the prior three years. The previous standard allowance was £40,000, so where no pension contributions were made in the previous 3 years it is possible to make gross pension contributions of up to £180,000 prior to 5 April 2024.

 

Tax-efficient investments

There are a number of tax-efficient investments. Some of these permit the investment to be carried back to previous years to accelerate tax relief. For example, up to 100% of investments into a qualifying EIS company can be carried back to the previous year. A maximum investment of £1 million is permitted (£2 million if invested in one or more qualifying knowledge-intensive companies). Tax relief is available at 30% and can be carried back a tax year.

Additionally, 50% income tax relief can be claimed on up to £200,000 in start-up companies. This can also be carried back to previous years.

 

ISA Allowances

UK residents aged 18+ can invest up to £20,000 each and parents can fund a junior ISA or child trust fund with up to £9,000 per child for 2023/24 – making a total of £58,000 for a family of four. With the Chancellor keen to boost the UK economy, he is looking to give an increase in this amount by £5,000 for UK investments.

Children will automatically have access to the funds in their ISA when they reach age 18 but ISAs are a useful vehicle for building up funds to support them through higher education.

Investors who have not used up their full ISA allowance, should consider selling shares yielding dividends outside their ISA and buying them back within this tax-exempt wrapper, although care should be taken as this could trigger a capital gains tax charge.

 

Trading Income: Basis Period Reform

Basis period reform mainly affects the self-employed (sole traders) and partnerships which do not use an accounting period end date between 31 March and 5 April.  The changes mean that you will have to report your business accounting information on a tax year basis on your tax return starting from the 2024/25 tax year.

The rules regarding basis periods are changing from the 2023/24 tax year.

This means that if your business doesn’t have an accounting date that ends between 31 March and 5 April, you will fall into the transition rules starting in the 2023/24 tax year.

If you choose not to change your accounting year-end, the profits will be apportioned between different tax years.

For example, if you have a year-end of 31 December, then the profits reportable for the tax year to 5 April 2025 will include 9 months of profits from the Y/E 31/12/24 and 3 months from the Y/E 31/12/25. As the filing deadline will be 31 January 2026, it is likely that the profits figure for the Y/E 31/12/25 would need to be estimated. It would then be necessary to submit accurate figures via an amended tax return once the accounts have been finalised.

If you haven’t already done so, you may wish to discuss the basis period reform with the Partner who is responsible for your accounting and tax affairs to decide whether you wish to change your accounting period end to 31 March or not.

 

Capital Allowances

As the basis period for trades is now to be aligned with the tax year-end, if assets are being acquired, they will need to be brought into use prior to 6 April 2024 to qualify for a claim in the current basis period.

 

Company Cars

If you are considering replacing a company car, please be aware that tax bands are increasing by 1% per year, commencing with the first increase in the tax year 2025/26.

 

Reporting Benefits in Kind (BiK) and taxable expenses

Please note that from April 2026, it will be mandatory to report these via payroll software.

The deadline for reporting BiK’s and expenses for the year ended 5 April 2024 is 6 July 2024. Therefore, you should provide us with all relevant information as soon as possible after 5 April 2024.

 

Capital Gains Tax

Everyone can realise capital gains up to the annual exemption of £6,000 in 2023/24. The exemption is available to each individual, including minor children, but any exemption unused in a year cannot be carried forward. Married couples and civil partners can transfer assets between them on a no gain/no loss basis and such transfers should be considered to ensure that the annual exemption can be fully used.

It is important to note that the annual exemption will be reduced from £6,000 to £3,000 from 6 April 2024.

Remember, if you sell a UK residential property and there is tax due, a report must be made to HMRC within 60 days of completion.

From 6 April 2024, the higher rate of CGT is being reduced to 24% from 28%.

 

Make Gifts to Use Annual IHT Allowances

You can give away £3,000 plus £250 to as many individuals as you like in a year. Other limits apply to gifts in connection with marriage.

Please note that there are other rules regarding IHT gifts such as regular gifts out of income and the 7-year rule. Should you wish to consider these,we recommend that you contact us to obtain the relevant advice to ensure that you follow the correct procedures and thus preserve the tax savings that you seek.

 

State Pension

If you have gaps in your National Insurance record, you can make voluntary contributions for the previous 6 years.  Visit www.gov.uk to find out more or seek advice from the Future Pension Centre (if you’re below State Pension age) or the Pension Service (if you’ve reached State Pension age).

If you have gaps in your National Insurance record, we recommend that you obtain advice from an Independent Financial Adviser to determine the suitability of making voluntary payments in your particular circumstances.

 

Summary

If you would like to discuss any of the options above, please do get in touch with us.  With Easter being early this year and the Budget just announced, it is important that planning is done as early as possible.