Pre year-end tax planning checklist 2023/24

Pre year-end tax planning checklist 2023/24

Managing your personal wealth and tax liability requires regular review and clear tax planning strategies for yourself and your family. Striking a balance between managing risk and maximising your personal wealth is complex.

Before the tax year end, it is important as a business owner to review your personal tax situation. In this blog we provide advice and tax tips on key areas to compile a pre-year end tax planning checklist. This checklist will ensure you consider areas that will affect your personal tax bill.

What to do before year end?

The current tax year officially ends on the 5th April 2024 with the 6th April 2024 being the first date in the 2024/25 tax year. Before the tax year end it's important to review all the key areas below to ensure you minimise your tax liability and benefit from tax relief where appropriate.

Speak to your accountant early in 2024 to work through the areas below to ensure you pay less tax.

Read our blog on how to get the best from your pre-year end meeting with your accountant.

Calculate estimated tax payments

It is important to keep track of your personal tax situation and potential payments to avoid penalties. Use your accountant to work with you on understanding your personal tax liability and minimising this liability before the tax year end. A well thought out tax planning strategy is vital to pay less tax.

Find areas for tax savings

There are many areas where tax savings can be made including:

• Income tax
• Dividends
• Pensions
• Savings and investments
• Inheritance Tax
• Gifting and charitable donations

You should understand and work with your accountant on tax efficient methods for extracting cash from your business.

Taxable income you should be accounting for before year end

Income tax

Every UK resident taxpayer is entitled to a tax-free Personal Allowance which is £12,570 for 2023/24. Your Personal Allowance reduces (down to a minimum of £0) when your income exceeds the current limit of £100,000.

You lose £1 of the allowance for every £2 of income over that limit. For example, if your taxable income is £125,140, your Personal Allowance is reduced by £12,570 (i.e. your Personal Allowance would become £0). This means that if your income falls between £100,001 and £125,140 you have an effective rate of tax rate of 1½ times your usual rate of tax (within that banding you are effectively paying 50.625% tax on dividends, or 60% tax on other income).

You will have no Personal Allowance where your income exceeds £125,570.

The personal allowance has been frozen at £12,570 from 6 April 2024.

Tax Tip - Spend to save tax

If your income falls above one of the thresholds, you might want to consider reducing your tax liability through tax-efficient spending. There are several ways you can do this such as: making pension contributions; tax-efficient investments; or Gift Aid charity donations.

Tax Tip - Personal Allowance transfer

Where your spouse or civil partner does not use all of their Personal Allowance, consider jointly electing to transfer an element to you (if you are a basic rate taxpayer) to reduce your family tax burden.

Tax Tip - Alter your income profile

Where possible, try to ensure that you generate sufficient income to fully utilise the Personal Allowance and basic rate band. This is not always possible, but potentially can be done through careful planning of the timing of: dividends from a private company; distributions from a trust; or income drawdowns from an investment bond.

Dividends

As a limited company business owner, dividends can be used as part of the reward strategy for a private limited company.

The first £1,000 of dividends are tax-free regardless of which tax rate band into which you fall. This relief is in addition to your Personal Allowance.

The Dividend Allowance is reducing from £1,000 to £500 as from 6 April 2024.

Tax Tip - Reviewing dividend levels

Dividends can be taxed at a lower rate than other income. Director- shareholders can often influence the level of salary and dividends when deciding how they are rewarded by their company as a director and as a shareholder. With dividends now suffering Income Tax having already been paid out of profits that will have suffered Corporation Tax at 19%-25%, and given that the main rate of Class 1 National Insurance for employees is reducing from 12% to 10% on 6 January 2024, it may be time to revisit this dynamic.

Tax Tip - Family involvement

If you are a director-shareholder, you may wish to consider who else in your family could have shares, in order to make use of their allowances. This planning might also involve creating jointly-owned shares. Income from jointly owned assets is generally shared equally for tax purposes, regardless of whether the asset is owned in unequal shares. It is possible to submit an election to H M Revenue and Customs to split the income proportionally in line with the ownership of the asset.

Tax Tip - Research and Development

Dividends are not taken into account when considering the costs incurred in respect of director-shareholders who are involved in Research and Development activities, therefore consideration should be given to the level of salary

Capital Gains Tax

It is important to remember that you have an annual exemption for the tax year which is £6,000 for 2023/24. The annual exemption is reducing to £3,000 as from 6 April 2024.

This is a "use it or lose it" exemption, so it is not possible to carry it forwards.

Married couples and civil partners can transfer assets between themselves at no gain/no loss, so it can be possible to crystallise combined capital gains of £12,000 without being subject to tax.

Tax Tip - Use the exemption

The annual exemption cannot be carried forward or transferred, so aim to make disposals on or before 5 April each tax year in order to use that year’s exemption.

Tax Tip - Timing and use of the standard rate band

The timing of a disposal may affect the amount of CGT payable. For example, if you are a lower rate taxpayer in a tax year but expect to be a higher rate taxpayer in the next tax year, realising a disposal when you are a lower rate taxpayer may reduce the CGT payable.

Tax Tip - Losses

Capital losses must be offset against capital gains in the same year or carried forward to offset against future capital gains above the annual exemption. Careful timing of the disposals of assets which will realise losses can reduce future Capital Gains Tax liabilities. Where losses arise, a formal claim is required and must be submitted to H M Revenue & Customs within four years of the end of the tax year of the loss.

Tax Tip - Transfers

Capital assets that might be sold can potentially be transferred to, or split with, spouses or civil partners who can utilise their own annual exemption and standard rate band.

For more information on income tax and dividends, read our tax planning guide.

Investment and savings

ISAs: The ISA limit for the 2023/24 tax year is £20,000. This limit cannot be carried forward therefore, if you fail to utilise the full allowance, it will be lost.

Seed Enterprise Investment Scheme (SEIS): The SEIS is designed to encourage individuals to invest in shares issued by qualifying, unquoted companies established in the UK. You can invest up to £200,000 per tax year and receive income tax relief of up to 50% of the amount invested. The relief can be claimed against the current tax year and/or previous tax year's income tax liability. There are also Capital Gains Tax and Inheritance Tax benefits of SEIS.

Enterprise Investment Scheme (EIS): You can invest up to £1m in a tax year or £2m if the company is a 'Knowledge Intensive Company'. Your tax liability is reduced by 30% of the sum invested. The relief can be claimed against the current tax year and/or previous tax year's income tax liability.

For more information on savings and investments, read our tax planning guide.

Inheritance tax

IHT is payable at 40% if your net Estate on death totals more than the tax exempt bands: Nil Rate Band (NRB) £325,000 Residential Nil Rate Band (RNRB) £175,000.

Spouses and civil partners are chargeable to IHT separately, so the available exemptions apply to each of them separately. Spouses and civil partners can make transfers to each other, in their lifetime and on death, free of both IHT and CGT.

Each individual will have a maximum combined NRB/RNRB of £500,000. Subject to the overall limit on taxable estates above £2m applying to the RNRB.

IHT can often be reduced, and potentially reduced to £0, through careful and timely planning.

Lifetime gifts are cash or assets gifted by the person who died while they were still alive. Care is need when considering lifetime giving.

Trusts can be a useful mechanism to protect assets and benficiaries and can be created and utilised during your lifetime and on death.

When considering IHT planning, it's important to consider all IHT reliefs and exemptions. IHT can be a complex area, so seek advice from your accountant before taking any steps.

For more information on IHT, read our tax planning guide.

Tax Tip - Gifting now

Start the seven-year PET 'clock' running by gifting assets during your lifetime to minimise the IHT payable on your death.

Tax Tip - Surplus income

If you have surplus income, consider making use of the exemption for gifts as normal expenditure out of income.

Pensions

Employer Pension Contributions are extremely tax-efficient and can be an essential part of the reward strategy for directors and key employees. The company can make employer pension contributions on your behalf in order to maximise the AA (including any unused AA brought forward from the previous three tax years.

The company can claim tax relief on the employer contributions, provided these are not considered excessive.

There is a Pension Annual Allowance (AA) for pensions meaning you can contribute up to £60,000 a year (includes employer and personal contributions) into a pension scheme. The three years prior to 2023/24 the AA was £40,000.

If you haven't made use of your full Annual Allowance in the previous three years and were a member of a qualifying pension scheme, you can utilise this unused allowance in the current tax year.

If you are a higher or additional rate taxpayer (intermediate rate, higher rate or top rate for a Scottish taxpayer) you can save Income Tax by making personal pension contributions for the tax year.

You must have sufficient earned income (principally employment income or trading profits) to cover the personal contributions.

The total value of your pension savings are subject to a Lifetime Allowance (LTA), currently £1,073,100 for 2023/24.

You can make personal contributions on behalf of your family, with the contributions going to their respective pension funds. This can include your children, grandchildren and members of your family who are not working.

For more information on pensions, read our tax planning guide.

Other areas of tax to consider

For many business owners, personal wealth is inextricably linked to your business. Whilst our focus in this blog is personal tax, corporate tax considerations, should also form part of your tax planning strategy. This includes areas such as Corporation Tax, tax reliefs including Research & Development Tax, Family Investment Companies and Capital Allowances.

For more information on these other areas, read our tax planning guide.

How can Haines Watts help you?

Personal tax can be complicated, with increased legislation and changing circumstances such as marriage, divorce, school fees planning, retirement, and long-term care.

So how you structure your personal affairs has a big impact on the tax you end up paying. We’ll work with you to come up with an individual tax planning strategy that makes sure you pay the least amount of tax.

We can help to optimise tax reliefs and exemptions in a way that is tailored to your individual circumstances, ensuring you don’t pay too much tax.

Let’s talk about how we can reduce your personal tax costs. Contact our team today in Liverpool, Chester or Wirral.