Use It or Lose It – Tax tips 2022-2023

With less than a month to go before the end of the tax year, J&J provide some essential tax saving measures that people can take before the tax year ends on 5 April 2023.

Use your ISA allowances

UK residents aged 18+ can invest up to £20,000 each, further parents can fund a junior ISA or child trust fund with up to £9,000 per child for 2022/23 – making a total of £58,000 for a family of four.

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 realising 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.

Take advantage of tax-free pension contributions

The standard amount that an individual can set aside tax-free each year for a pension is £40,000 – and any unused relief in the prior three tax years can be brought forward. There is also a lifetime limit of £1,073,100 which is frozen until the 2025/26 tax year.

Taxpayers close to the limit should take advice on contribution levels, as exceeding the available allowance will mean a tax charge will arise.

Qualifying taxpayers who don’t receive full tax relief at source should disclose their contributions in their annual tax return to receive a rebate at their marginal rate.

Making pension contributions from a limited company, is not only a tax free benefit to employees, but can bring significant tax corporation tax savings, up to £7,600 per employee for the year to 31/3/2023.

Boost your state pension by filling gaps in your National Insurance record

You can usually pay voluntary National Insurance contributions for the past six years to fill gaps in your National Insurance record to boost your qualifying years that are used to calculate your state pension entitlement. The deadline is 5 April each year.

However, because of changes to the state pension system introduced in 2016, ‘transitional arrangements’ are in place which enable men born after 5 April 1951 or women born after 5 April 1953 to make up for gaps between tax years April 2006 and April 2016.

While the deadline to do this was meant to be 5 April 2023, this has now been extended to 31 July 2023, giving people extra time to decide whether to fill the gaps in their National Insurance record. After this time, you will only be able to pay voluntary contributions for the past six years.

Voluntary contributions will not always increase your state pension entitlement, but for those who are eligible – and depending on circumstances – a modest outlay could help top up your state pension payments. 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). 

Avoid the child benefit clawback

Child benefit is clawed back where annual taxable income (or the taxable income of a partner) exceeds £50,000.

If both partners can keep their annual taxable income below £50,000, child benefit will not be clawed back through the high-income child benefit charge at a rate of 1% of the benefit for every £100 of income over £50,000.

Making personal pension contributions or exchanging salary in return for employer pension contributions can reduce your taxable income to keep it below the £50,000 threshold.

Use annual exemptions

Everyone can realise capital gains up to the annual exemption tax-free – £12,300 in 2022/23. 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 £12,300 to £6,000 from 6 April 2023 and further reduced to £3,000 from 6 April 2024.

Match capital gains and losses to reduce your tax bill

If you hold stocks and shares outside an ISA, selling them can trigger capital gains: where your total gains exceed the annual exemption (see above) you will pay tax on them.

If you also have investments standing at a loss, selling the asset allows you to set that loss against any gains that are taxable – either in 2022/23 or in later years (provided you claim it through your tax return). So matching gains and losses can cut your overall tax bill.  

If you think the loss-making shares had long term potential, you cannot buy back them back immediately (a 30-day matching rule applies) but you can buy alternative shares in companies in the same sector, or buy them through your ISA or your spouse could invest in them.

Own a company? Consider paying yourself a dividend

It should generally be more tax-efficient overall to withdraw profits from your company by way of dividends rather than salary payments for 2022/23. 

The position depends on a number of factors for company owner-managers but the balance will shift for some company owners when corporation tax rises from 1 April: in 2023/34 dividend payments will suffer more tax overall than salary payments if you are a higher or additional rate taxpayer.

Of course, there are other factors to consider as well: dividends are only possible if the company has sufficient ‘distributable reserves’ and may alter the value of the company’s shares up or down. Also dividends do not allow the recipient to pay tax-deductible pension contributions.

Make gifts to use annual inheritance tax allowances

Reducing the value of the part of your estate that is above the nil rate band (£325,000) will reduce the inheritance tax (IHT) payable when you die.

Consider giving assets you do not need to other family members now. Gifts to a spouse or civil partner to enable them to use up their nil rate band are tax-free and gifts to other family members can also be tax-efficient over time.

Most lifetime gifts to individuals that are not covered by a lifetime exemption do not immediately trigger IHT and become totally exempt if you survive for seven years. Whilst the gift remains in your estate, the rate of IHT applied to it on death (40%) reduces each year depending on how many years you survive after making the gift.

You can give away up to £3,000 worth of gifts a year plus £250 to as many individuals as you like in a year and £5,000 to your children on their marriage.

Credit: Croner-I Taxes 10/3/2023