Top ten New Year tax resolutions

1. Maximise available income tax allowances

Every individual (if domiciled and resident in the UK), is entitled to a tax-free personal allowance for the year of £12,570, below which, no Income Tax liability arises.

If your total taxable income exceeds £100,000, this personal allowance starts to be reduced.

Every individual is also entitled to a tax-free dividend allowance of £1,000 (falling to £500 from 6 April), and a tax-free savings allowance for interest income of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

It may be possible to reorganise your income sources, especially if you are married or in a civil partnership to make use of these allowances.

2. Transfer income producing assets between spouses

If investment income is more in favour of one spouse, the other may not be making full use of their allowances (see above) or lower tax rates.

If there is an opportunity to adjust the ownership of assets to balance the income position, the saving in Income Tax can be significant. For example, one spouse may be a higher rate taxpayer and the other is a basic rate taxpayer. Deposit accounts held by the higher rate taxpayer benefits from a lower tax-free saving allowance of £500 and any additional interest is taxed at 40%. Transferring these accounts to a basic rate saving spouse will double the tax-free allowance to £1,000 and halve the rate of tax at 20%.

Transfers between spouses are not generally chargeable events for Capital Gains Tax or Inheritance Tax purposes, but do take care when considering any transfers of properties, as there could be unintended consequences affecting Stamp Duty Land Tax and availability of Capital Gains Tax reliefs.

3. Claim the Marriage Allowance

Still largely underclaimed, the Marriage Allowance was introduced in April 2015 and is available where both spouses were born after 6 April 1935, one partner earns an income under the Personal Income Tax allowance of £12,570 and the other is a basic rate taxpayer.

In these circumstances, if one spouse is not fully utilising their tax-free personal allowances (including the dividend and savings allowances mentioned above), they can claim the Marriage Allowance to transfer 10% of their personal allowance to their spouse – £1,260 for the 2023/24 tax year, which would represent a tax saving for the recipient spouse at 20%, of £252.

It is also still possible to backdate the claim to previous years.

This is a permanent election that needs to be made directly with HMRC (the claim is not initially made on a tax return) www.gov.uk/marriage-allowance. It can be cancelled in a later year if you cease to meet the criteria.

4. Defer income into the following tax year

This is not something that will be available to everyone but if you are able to control the timing of income that you are due to receive – company bonuses or company dividends for example or the encashment of an investment bond or life policy, this can be very beneficial.

It may be worth considering deferring income into the following tax year, perhaps if income is expected to be lower in the following year and you can make use of a lower rate of tax, or to ensure your income is within the £100,000 limit when the personal allowance starts to be restricted.

5. Make gift aid donations

If you are a higher or additional rate taxpayer, making a gift of cash to a UK registered charity (and ensuring you tick the gift aid declaration) can reduce your tax liability. This can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000.

When you make a cash gift to a charity under the gift aid scheme, this is treated as being made net of basic rate tax at 20%. The charity then reclaims the tax from HMRC. For example, if you make a donation of £80, the charity then reclaims a further £20 from HMRC.

Where you pay tax at 40% or 45%, you can claim additional tax relief through your tax return, so that you effectively only pay 20% tax on income up to the gross value of the donation, rather than at the higher rates as you normally would. Continuing with the example above, as a 40% taxpayer, by making a donation of £80, the charity will receive a further £20 from HMRC, and you will receive relief through your tax return of another £20.  The charity therefore receives £100, but the cost to you is just £60.

You can actually make your gift aid donation after the end of the tax year and claim to carry it back to the 2022/23 year, as long as the donation is made before you submit your tax return for 2023/24 and the claim is included on your original return (you cannot claim this on an amended tax return).

6. Make personal pension contributions

This is effective in a similar way to gift aid donations, except sadly there is no carry back facility as contributions are set against income in the tax year in which they are paid.

When you make a personal pension contribution, this is net of basic rate tax at 20%. If you are a higher or additional rate taxpayer, you can claim further tax relief through your tax return, so that you pay less tax at the higher rates and you reduce the effective cost of the contribution.

Again, this can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000.

For those with younger children and a salary above £50,000, if you or your partner are receiving Child Benefit, there is the High Income Child Benefit (HICB) charge which starts to offset the benefit, with the tax charge equalling the benefit once income reaches £60,000.

By making personal pension contributions and/or charitable gift aid donations, it is possible to effectively reduce your income and reduce the charge.

This is, however, a complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief, so do be careful and seek advice before making a contribution.

The amount you can contribute is partly linked to the amount of earned income you have in a tax year, usually from employment, self-employment, or profits from qualifying Furnished Holiday Lettings. However, if you do not have income from any of these sources, you are still entitled to make a contribution to a pension scheme of £2,880 and receive tax relief by the pension provider topping this up with £720 from HMRC to give a total amount invested of £3,600 gross.

This can be an effective means of building up pension savings for children and grandchildren, as contributions can be made by a third party on behalf of another individual. 

7. Utilise the Capital Gains Tax Annual Exemption

Similar to the tax-free personal allowance for Income Tax, every individual is entitled to an Annual Exemption from Capital Gains Tax, with total gains below that limit (£6,000 for 2023/24) having no charge to Capital Gains Tax.

This is a use it or lose it relief, so if not used, it is lost and cannot be carried forward to the following year. The allowance next year will fall to £3,000 so consider if you are holding assets at a gain that it would make sense to dispose of to maximise your annual exemption.  With the allowance falling you should also consider if gains will be taxed at basic rates. Basic rate gains are taxed at 10% at a lower rate than Income Tax and there is no guarantee that these low rates will continue.

As with looking at transferring income producing assets between spouses to benefit from lower rates of Income Tax, the same can be true for Capital Gains Tax. If an asset is transferred between spouses prior to a sale, you could make use of a further annual exempt amount, and perhaps lower rates of Capital Gains Tax depending upon their level of income.

8. Defer capital gains into the following tax year

This can be easier to control than income, as a capital gain is treated as falling into the tax year in which the disposal takes place and there can be more control over when an asset is sold.

If you have already made disposals of assets in the current tax year, utilising your Annual Exempt amount for the year, you may want to delay further disposals until the next tax year (from 6 April 2024), when a new allowance will be available, although do note that the level of the allowance falls to £3,000 in 2024/25. Deferring into a new tax year will move the date the tax has to be paid by a year, other than property where any tax has to be paid within 60 days of completion.

For the sale of shares and investments, the date of sale for Capital Gains Tax purposes will be the trade or bargain date, rather than the settlement date, and for land and property sales, this is based on the contract date, rather than the date of completion, if different.

9. Utilise annual gift exemptions for Inheritance Tax

Another ‘Annual Exempt’ amount available for every individual, is one in respect of Inheritance Tax.

Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for Inheritance Tax purposes. This means that if the donor survives for seven years from the date of the gift, it will become exempt from Inheritance Tax.  However, if they pass away before seven years has passed, the amount of the gift will still be included in their estate in calculating the Inheritance Tax due.

There are a number of potential exemptions available, but the standard Annual Exempt amount is £3,000. If total gifts within a tax year are less than this, the gifts will be immediately exempt and the seven-year survivorship rule does not apply.

It is possible to carry forward an unused annual gift exemption for one year if it has not already been used. Therefore, if you did not make any gifts in the 2022/23 tax year, you could potentially make gifts of up to £6,000 by 5 April 2024 with immediate exemption from Inheritance Tax.

Do note that you are regarded as using your current year allowance first, before any unused brought forward allowance. Therefore, if you did not make any gifts in the 2023/24 tax year and you make gifts of £3,000 in the 2022/23 tax year, you will have used your 2023/24 allowance and there will be nothing to carry forward to the new tax year.

10. Make use of Individual savings account (ISA) allowances for you and your family

ISAs are a great means of tax efficient investment, as income arising from the underlying investments is tax free, as is the capital growth, so no exposure to Income Tax or Capital Gains Tax. In an era of very high personal tax, the tax-free status of ISAs makes them very valuable tax wise.

The annual limits for ISA investment are currently £20,000 in total for an adult and £9,000 for Junior ISA for a child under the age of 18.

The above provides an overview of a number of different tools that can be used in ensuring that you maximise your tax efficiency and use of allowances available to you, but please do seek advice from our highly experienced teams before acting on any of the above, in order that we can ensure which are most suitable to your circumstances. Click here…