3 months to get the most from the 2022-23 tax year
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The end of the 2022-23 tax year ends in three months (April 2023). Whilst it may sound far away, in our experience this window closes rapidly – taking away opportunities for many people to make the most of their tax allowances. This Christmas period, as you spend time with loved ones, some of the quieter moments could be ideal times to make sure you are on track to save optimally on tax. Putting more income and wealth back into your pocket right now could relieve a lot of financial pressure in the coming months, especially with the cost of living continuing to rise. Below, our Grantham financial planners offer ideas to help you get the most from remaining allowances in the 2022-23 tax year.
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Check your tax allowances
One notable announcement from the November 2022 Autumn Statement was Chancellor Hunt’s plans to reduce tax-free allowances in the coming years. In April 2023, the Annual Exempt Amount will go down to £6,000 (currently it is £12,300) and the tax-free allowance for dividends will also reduce to £1,000 (down from £2,000 at present). In the following tax year (2024-25), these will go down even further to £3,000 and £500, respectively.
April 2023, therefore, marks a significant date for many individuals to save on taxes with their investments. Certain investors may, for instance, wish to bring forward plans to sell additional properties (e.g. buy to lets) or specific shares held in general investment accounts. A delicate balance may need to be struck here, as the tax savings from an early asset disposal (e.g. in 2022-23) might not exceed the returns you could realistically expect from retaining it. Speak with a financial planner to ensure your assets are organised effectively in light of your allowances.
Maximise your ISA
In 2022-23, you can contribute up to £20,000 into your ISA(s) and this is not expected to change in the coming tax years. However, given that the aforementioned tax-free allowances are likely to shrink between now and 2024, the current tax year (2022-23) could be the last chance to sell non-ISA assets at a lower tax bill – then, move capital (and gains) into an ISA. Here, any returns are protected by the ISA “wrapper”, allowing an individual to generate interest, capital gains and dividends without tax. The advantage of planning ahead now, in December 2022, is that certain people may be able to commit more to their ISA, in total, compared to leaving it to the “last minute” in March 2023 (when you may not have a lump sum ready to invest).
Work with your partner
The Chancellor made no mention of removing the right of married couples (and civil partners) to sell or transfer assets between partners, tax-free. However, this tax planning strategy will likely be less effective in future tax years as a couple’s combined allowances are unable to produce the same level of tax savings as in 2022-23. This adds more urgency for couples to act now in December 2022, when you both still have time to review and arrange your finances.
At present, for instance, a married couple has (in effect) a combined ISA allowance of £40,000 (i.e. £20,000 for each person x2). The two individuals can also enjoy up to £4,000 in tax-free dividends if they both maximise their allowances, as well as up to £24,600 in capital gains from asset disposals outside of ISAs. For instance, if the husband in a marriage has fully used his Annual Exempt Amount for 2022-23 but his wife has not, then he could give some of his shares (or other non-ISA assets he wishes to sell) to her. She can then release up to £12,300 in capital gains without tax, assuming she does so before 5 April 2023 (after which the tax-free threshold goes down to £6,000 per year).
Conclusion & invitation
There may still be ways to reduce taxes on your investments if you find that the above ideas do not work for you (e.g. if you have already maximised your ISA). For example, increasing your pension contributions may help you avoid falling into a higher rate of income tax if your earnings are approaching the next tax band. This, in turn, could help reduce your capital gains tax if you inevitably need to pay it on certain asset disposals, since different rates exist for various income tax brackets. Another idea is to consider tax-efficient investments.
The Enterprise Investment Scheme (EIS), for instance, can allow an investor to defer a capital gain liability if gains from a non-EIS investment (e.g. a buy to let) are committed to EIS-qualifying investments. However, speak to a financial planner about these options first, as schemes such as EIS and VCTs (venture capital trusts) may involve a higher level of investment risk than you are currently comfortable with.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
