Effective tax planning for the end of the financial year

Written by James Appleby on 11th January 2023 | 10 minute read

As the end of the tax year approaches, now is the perfect time to ensure you have your financial affairs in order and to double check that you’ve taken advantage of all the tax-efficient allowances available to you.

This is even more important this year with the changes to Capital Gains Tax and Dividend Allowances announced in the Autumn Statement:

The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023, and to £500 from April 2024.
The annual Capital Gains Tax exemption will be reduced from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.

Your pension

You can contribute as much as you like to your pension, but there is a limit on the amount of tax relief you will receive each year.

This annual allowance is currently £40,000. An individual can’t use the £40,000 Annual Allowance where 'relevant UK earnings' are less than £40,000, although your employer still could. You may be able to, however, carry forward unused allowances from the past three years, provided you were a pension scheme member during those years.

Threshold Adjusted Income limit is £200,000 and the Adjusted Income Limit is £240,000. If your income plus pension contributions exceed the Adjusted Income Limit, your Annual Allowance is reduced by £1 of every £2 you are over the Adjusted Income Limit.

A Lifetime Allowance also places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100 and has been frozen at this level until April 2026.

If you have children under 18, a spouse who does not work, or who may not be earning enough to pay Income Tax, you can invest in a pension for each of them. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, would amount to £3,600 a year.

Your Individual Savings Account (ISA) allowance

The ISA allowance is £20,000 for the 2022-23 tax year. You can put all the £20,000 into a Cash ISA, or invest the whole amount into a Stocks and Shares ISA or an Innovative Finance ISA. You can also mix and match, putting some into Cash, some into Stocks & Shares and the rest into Innovative Finance if you wish. However, the combined amount can’t exceed your annual ISA allowance. With pension contributions subject to annual and lifetime allowance limits, ISAs represent an excellent way of topping up retirement income. There is no Capital Gains Tax (CGT) payable on ISA proceeds. You cannot carry over your ISA allowance once the tax year has ended.

In certain circumstances, investors can use existing holdings to open or top up their ISAs, this arrangement is known as a Bed & ISA. This is a way of transferring assets held outside an ISA into an ISA so that future investment income and growth are sheltered from tax. The investments are sold, cash is transferred into the ISA and the investments are repurchased. Charges apply and you could end up with a CGT liability if the gain you make on selling the asset together with any other taxable gains you make within the tax year exceeds the annual CGT allowance.

A Lifetime ISA is another option available.

Junior ISA contributions

Junior ISAs are a tax efficient way to build up savings for your children (and grandchildren) and can be opened for any child under 18 living in the UK. The money can be held in Cash and/or invested in Stocks and Shares.

They work in exactly the same way as your own ISA, however, the maximum investment is £9,000 per child.

Gifting for Inheritance Tax (IHT) purposes

You can make gifts worth up to £3,000 in each tax year. These gifts will be exempt from IHT on your death. You can carry forward any unused part of the £3,000 exemption to the following year but if you don’t use it in that year, the exemption will expire.

Certain gifts don’t use up this annual exemption, however, there is still no IHT due on them e.g. wedding gifts of up to £5,000 for a child, £2,500 for a grandchild (or great-grandchild) and £1,000 to anyone else. Individual gifts worth up to £250 are also IHT free.

These are relatively small sums, but you should use these up where possible to gradually reduce your overall estate.

Using your CGT allowance

Every individual is entitled to a CGT annual exemption which for the 2022-23 tax year is £12,300 (£6,150 for trusts). However, this is being reduced to £6,000 from April 2023 and then to £3,000 from April 2024.

You can’t carry forward this relief and so you may look to crystallise gains up to this amount before the end of the tax year. Capital losses can also be used to offset gains.

Above the CGT allowance, basic rate tax-payers selling investments would pay CGT at 10%, with higher rate tax payers paying 20%.

Spouses have two annual exemptions between them and can take advantage of the rules allowing assets to be gifted with no CGT implication until the asset is subsequently disposed of.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)

In addition to simpler tax planning ideas, there are other more complex areas, such as VCTs and EISs, which are tax year end sensitive.

These are traditionally higher risk investments but can offer up to 30% tax relief and provide portfolio diversification.

EISs – maximum investment of £1 million (or £2 million as long as at least £1 million of this is invested in knowledge intensive companies) with 30% tax relief provided the investment is held for 3 years, gains are also exempt from CGT provided they have been held for 3 years.

VCTs – maximum investment of £200,000 with 30% tax relief provided the investment is held for 5 years, gains exempt from CGT, conditions apply.

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Using your dividend allowance

For the current tax year, investors can earn up to £2,000 in dividend income tax-free. However, The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023, and to £500 from April 2024.

How much tax you pay on dividends above the Dividend Allowance depends on your Income Tax band.

Tax year-end deadline – 5th April 2023

Here’s a reminder of the main tax planning opportunities:

Pensions – Current Annual Allowance of £40,000
Individual Savings Accounts (ISAs) – maximum contribution of £20,000 each
Junior Individual Savings Accounts (JISAs) - maximum contribution of £9,000 per child
Gifting for Inheritance Tax (IHT) Purposes – up to £3,000 a year
Using Capital Gains Tax (CGT) Allowances - £12,300 annual exemption per person
Enterprise Investment Schemes (EISs) - maximum investment of £1 million (or £2 million as long as at least £1 million of this is invested in knowledge intensive companies)
Venture Capital Trusts (VCTs) - maximum investment of £200,000

The information contained is based on our understanding of current allowances and rates on 10 January 2023, which could be subject to change.

Due to the potential for losses EISs /VCTs investment are considered to be high risk investments. Don’t invest unless you’re prepared to lose all the money you invest. These are high‑risk investments and you are unlikely to be protected if something goes wrong. Take 2 min to learn more.

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This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

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