Year End Tax Planning Tips

Preparing for the year-end tax planning

Year-end planning

It is important to carry out an annual review and ensure that you have planned properly for the current tax year and that your tax liability is no higher than necessary. Whilst the subject of tax doesn’t excite very many people, a regular review of your tax affairs will at least help ensure that the tax taken from your family is as small as possible.

Not all the areas set out below will be relevant to everyone, but if we can help in any way with any of the issues raised in this document, please get in touch. Remember, in most cases, to benefit from any tax relief, the relevant action must be taken before the tax year ends.

Income Tax

The personal allowance for 2024-25 is £12,570. This is the taxable income you can earn annually without paying any tax. All individuals should ensure that, where possible, they fully utilise their personal allowance.

The personal allowance is gradually withdrawn by £1 for every £2 net income over £100,000. Net income takes account of losses, pension payments and charitable contributions. This means that any taxable receipt that takes your income over £100,000 will reduce personal tax allowances. This creates an effective marginal tax rate of around 60% for those with an income between £100,000 and £125,140. This is far higher than the additional 45% tax rate for those over £150,000.

Those with earnings in this bracket should consider what financial planning opportunities are available to them to avoid this personal allowance anomaly.

For example, options could include increasing pension contributions, giving gifts to charity and investing in certain investment schemes.

Pension contributions

To be effective for 2024-25, a pension contribution must be paid by 5 April 2025. The income and gains arising from pension savings are generally exempt from Income Tax and Capital Gains Tax (CGT). Tax relief for contributions to pension schemes is given at a taxpayer’s marginal rate of Income Tax subject to the annual allowance.

There was also a lifetime allowance that applied before 6 April 2023. This was the maximum amount of pension and/or lump sum that benefited from tax relief. In the Spring Budget 2023, the Chancellor announced that the lifetime allowance (2022-23: £1,073,100) would be abolished. It started this process by removing the tax charge for exceeding the lifetime allowance from 6 April 2023 and fully abolished the lifetime allowance in the Finance Act 2024 from 6 April 2024.

The annual allowance for tax relief on pensions is currently £60,000 (It was £40,000 up to 2022-23), and there is a three-year carry-forward rule that allows taxpayers to carry forward any unused annual allowance from the last three tax years if they have made pension savings in those years. The annual allowance is reduced for high earners. Those with adjusted income more than £260,000 will see their allowance tapered. For every complete £2 that their income exceeds £260,000, the annual allowance will be reduced by £1, down to a minimum of £10,000.

Charitable donations

Donations to charity over the course of a tax year can add up, and taxpayers must ensure they keep a proper record of all donations to record them on their tax return. Donations made through the Gift Aid scheme allow the recipient charity to claim 25p worth of tax relief on every pound donated. Higher-rate and additional-rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax.

If it is clear you will not be a higher-rate taxpayer in 2024-25, it may be worth bringing forward any planned donations to maximise tax relief and provide earlier benefits to the charity of your choice.

It is also possible to give gifts of certain assets to charities and claim income tax relief on the value of the gift. This may be more tax-efficient for certain larger charitable donations.

Capital Gains Tax

As with income tax, taxpayers have an annual exempt amount for CGT, which is forfeited if not used. The annual exemption for individuals in 2024-25 is £3,000 (2023-24: £6,000). A husband and wife each have a separate exemption. Same-sex couples who acquire a legal status as civil partners are treated in the same way as married couples for CGT purposes. Married couples and civil partners should ensure that assets sold at a gain are jointly owned or that each partner utilises their annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward.

Bed and breakfasting (sale and repurchase) of shares is no longer tax effective, but some other techniques can be used to ensure the annual exempt amount is utilised or to establish a loss that can be set against other gains. Before undertaking such transactions, proper advice should be taken to ensure that all tax aspects have been considered.

Capital Losses

Capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should be avoided. In certain circumstances, a claim for capital losses can be carried back up to two tax years. This can help offset gains in earlier years.

Investment tax planning

ISA’s

Whilst the amount invested in an ISA does not benefit from tax relief, the income and gains are free from most taxes, including Income Tax and CGT. Withdrawals can be made at any time without the loss of tax relief, subject to the specific ISA manager’s terms and conditions.

If an ISA saver dies in a marriage or civil partnership, their spouse or civil partner inherits their ISA tax advantages. The current ISA limit is £20,000.

Enterprise Investment Scheme

The amount of income tax relief for individual investors in the Enterprise Investment Scheme (EIS) is 30%, and the maximum annual amount that an individual can invest in through the EIS is £1 million. The limit is further increased to £2 million if at least £1 million is invested in knowledge-intensive companies. Tax relief is limited to the amount that reduces the individual’s income tax liability for the year to nil.

The tax advantages of the EIS also includes CGT exemption on qualifying gains on shares held for 3 years, CGT deferral relief and tax relief for any losses made on the shares bought.

Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) provides extensive Income Tax and CGT breaks for investors, greatly encouraging much-needed seed capital in new businesses. The SEIS is most valuable for taxpayers who can fully benefit from the tax reliefs on offer.

For investors, the main benefits of the scheme are as follows:

• Income tax relief is worth 50% of the amount invested in qualifying individual investors on a maximum annual investment of £200,000.
• A 50% exemption from CGT on gains reinvested within the scope of the SEIS. The maximum gain to be relieved is capped at £200,000, which will be withdrawn if the SEIS relief is ultimately withdrawn.
• There is a 100% exemption from CGT on the sale of shares more than three years after the date they were issued.
• A SEIS investment will normally qualify for 100% relief from Inheritance Tax where the usual conditions are met.

Under certain circumstances, small business owners can also use the scheme to invest in their own businesses.

Venture Capital Trusts

The Venture Capital Trusts (VCT) scheme offers investors Income Tax relief of 30% on new subscriptions for ordinary shares in VCTs. The maximum amount qualifying for relief is £200,000 in each tax year. Dividends received from VCTs are exempt from Income Tax, provided the shares acquired (by subscription or purchase) are within the annual limit of £200,000 and held for 5 years. Shares in VCTs acquired within the annual limit are also exempt from CGT on disposal at any time, but losses on disposal are not allowable as capital losses.

Inheritance Tax

It is important to review your inheritance tax position as part of an annual review. It is highly recommended that you regularly review and update your Wills to ensure you are taking advantage of the current rules most effectively.

There is an annual exemption of £3,000 for gifts, which can be carried forward if not used to make a maximum gift of £6,000. These gifts are ignored if the donor dies within 7 years of making them.

It is also possible for wealthier taxpayers to make gifts and payments from income. With proper planning, this can be a useful tool, for example, enabling grandparents to help pay school fees for their grandchildren. However, careful consideration must be given to ensure that these payments are made from income and not from capital.

We can help advise you on setting up appropriate structures for this.

Page updated on 13/05/2024