As 2023 draws to a close, it’s that time of year where individuals need to start considering their tax planning strategies. With the right approach, you can make the most of available opportunities to minimise your tax liability and maximise your savings.
We’ve asked Josh Draycott, Tax Manager, to share some expert insights on year-end tax planning for individuals, to help try and make everyone’s least favourite T word slightly more bearable!
Take it away Josh…
Year-end tax planning allows you to review your financial situation, to be able to make informed decisions that can have a significant impact on your tax position. Even if you’re not the most organised individual, you’ll be thanking yourself later for getting a hold of your tax planning in advance!
Below I’ve outlined some of the actions you can take before the end of the UK tax year, to make sure you are making the most of your available allowances and reliefs.
Review your income and expenses
One of the first steps is to review your income and expenses for the current year. This includes analysing any potential deductions or credits that may be available to you. By identifying and applying these opportunities, you can reduce your taxable income and ultimately lower your overall tax bill- now who wouldn’t want that?!
Retirement Planning
Another important aspect to consider is retirement planning. Typically, it can be advantageous to contribute the maximum amount allowed into your pension before the end of the year. Not only will this help to secure your future, giving you peace of mind, but it can also provide potential tax benefits. Contributions made to pensions often attract tax relief, meaning individuals can reduce their tax liability whilst simultaneously saving for retirement. It is important to consult with us before proceeding with this as any contributions in excess of the annual allowance can generate tax liabilities.
Charitable giving
By making donations to charities before the end of the year, individuals can potentially claim a deduction on their taxes. The gift is made from the donor’s taxed income, and the charity benefits as they can claim a basic rate tax on the value of the gift. If you’re a higher rate taxpayer, you are eligible to claim an extra 20% of tax relief. Additional rate taxpayers can claim 25% of the gross value of the gift.
However, it is essential to understand the rules and limitations surrounding charitable contributions to ensure eligibility and compliance with tax regulations.
Capital Gains Planning
Utilise Losses
It’s important to consider the timing of any capital gains and losses. By strategically selling investments that have incurred losses, you can offset your capital gains and potentially reduce your tax liability. This is also known as tax-loss harvesting and can be an effective way to optimise tax outcomes.
Utilise Annual Exemption
The annual exemption for Capital Gains Tax (CGT) can’t be carried forward or transferred to future years. Therefore, it’s advisable to aim for disposals before 6 April 2023, to make use of this year’s exemption. It’s worth noting that the amount of the exemption will decrease from that date, making it even more crucial to take advantage of it now.
Consider Spousal Transfers
To optimise CGT savings, consider transferring assets to your spouse or civil partner prior to sale. By doing so, you can utilise their annual exemption, capital losses and basic rate bands. It’s important to ensure that any transfers are made outright and without preconditions to be effective for tax purposes.
Timing Is Key
The timing of a disposal can significantly impact the amount of CGT payable. For instance, if you anticipate being a higher rate taxpayer in the coming tax year, but currently fall under the basic rate band, consider a disposal in the current tax year. By doing so, you can ensure that some or all of the resulting gain falls within the basic rate band, therefore reducing the amount of CGT payable. However, keep in mind that this approach may accelerate the tax liability by one year.
