2023/24 Year-end tax planning guide

Make full use of bands and allowances

The incomes of married couples and civil partners are taxed separately. Each spouse or partner has their own personal allowance. In addition, married couple’s allowance is available if one party was born before 6 April 1935. There is also what is called the ‘marriage allowance’, a transferable allowance that potentially makes £1,260 of the personal allowance of one party available to the other in certain circumstances. The donor’s income must normally be below the personal allowance for this to be beneficial.

Where each party is in a different tax band, making sure that income is distributed appropriately is key. Optimally, the personal allowance of the lower income spouse should be used in full, and full advantage taken of access to lower tax bands. It may be beneficial to transfer income-producing assets, such as property, stocks and shares, or even bank accounts to do this. It is always important to make sure that any transfer is an outright gift, and that the donor no longer exerts control over, or derives any benefit from it. Evidence of such transfer is also required. Please do talk to us prior to any action, to make sure that arrangements are effective and do not inadvertently fall the wrong side of any anti-avoidance legislation.

Children are treated independently for tax purposes. They have their own personal allowance, annual capital gains tax (CGT) exemption and their own basic rate tax band and savings band.

Tip: who should help?

From a tax point of view, it is usually more efficient for grandparents, rather than parents, to provide funds for investment for under-age children.

Involve family in the business

For family companies and unincorporated businesses alike, involving family members and remunerating them appropriately is usually very beneficial. It can be a good way to multiply the opportunities to extract profits before hitting higher rates of tax, or where a spouse or child is unlikely to use their personal allowance, for example. But involvement must be a practical and commercial reality, and you must be able to evidence that family members genuinely work in the business. Remuneration must be incurred wholly and exclusively for the purpose of the trade, and could be challenged if considered excessive by HMRC.

Tip: pension planning in family companies

Pension contributions remain a highly efficient way for director-shareholders to extract profits. Pension contributions are deductible expenses for corporation tax purposes, so long as they are wholly and exclusively for the purposes of the trade, and where a spouse is employed by the company, the company can also make reasonable contributions on their behalf. So long as the remuneration package is justifiable, the company should be able to claim tax relief for these.

Note new CGT rules for separating couples

Transfers of assets between spouses can usually be made on a no gain/no loss basis for CGT purposes. But where spouses are in the process of separating, the rules are different. Until recently, the window in which such transfers could be made lasted only until the end of the tax year of separation. After that, transfers were treated as normal disposals for CGT purposes.

This has changed, so that for transfers on or after 6 April 2023, there are now up to three years after the tax year in which spouses cease to live together to make no gain/no loss transfers; and unlimited time if the assets are the subject of a formal divorce agreement. There are also special rules covering the position where someone has a financial interest in the former family home after separation, that apply when the home is sold.

Watch for Child Benefit charge

The High Income Child Benefit Charge (HICBC) is still something many people are unaware of. It applies where one of a couple gets Child Benefit, and either one or both partners has adjusted net income in excess of £50,000. Partner for these purposes includes someone you live with as if you were married, as well as spouse or civil partner. If both parties are over the income threshold, the charge is the responsibility of the higher earner.

The charge claws back Child Benefit at a rate of 1% for every £100 of income between £50,000 and £60,000. By the time income is £60,000, Child Benefit is withdrawn in full.

The government has said it intends to change the way that HICBC is administered and collected, so that those liable to pay can do so through their PAYE tax code. At present, however, taxpayers need to register for self assessment, and it’s the taxpayer who is expected to be proactive, and notify HMRC of their liability to pay the charge. There is an obligation to notify once adjusted net income is more than £50,000. In some cases, HMRC may make contact or send a nudge letter if it thinks someone is due to pay, but this does not happen automatically.

There’s a changing outlook for director-shareholders in family companies. Recent developments, such as the change to the Dividend Allowance and National Insurance contribution (NICs) rates; and potentially higher corporation tax rates, all mean remuneration may need rethinking. Checking the numbers in your own particular circumstances becomes increasingly important.

Corporation tax 

The main rate of corporation tax is 25% for companies with profits of more than £250,000. A small profits rate of 19% applies to profits of £50,000 or below. Where profits are between the two, corporation tax is paid at the main rate reduced by marginal relief. This provides a gradual increase in the effective corporation tax rate. In all, higher corporation tax rates and marginal relief may mean new choices for profit extraction.

Tax efficient remuneration

Traditional remuneration strategy involves a small salary, and extracting remaining profits as dividends.

Salary: this is usually set at a level sufficient to qualify for state benefits (notably State Pension entitlement) but pitched so that no liability for NICs arises. Salary counts as a deductible business expense for corporation tax purposes, as do employer NICs. Unless a director has a contract of employment that means they are a ‘worker’, there is no need to pay minimum wage hourly rates.

For 2023/24, the preferred salary in many cases will be £12,570, so that the standard personal allowance is fully used. NICs for directors are calculated based on an annual earnings period on salary and bonuses. Though employer NICs kick in at £9,100, employee NICs are due on earnings over £12,570, with a further 2% charged above the upper earnings limit of £50,270. We can help you review an appropriate figure for salary to suit your circumstances.

Dividends: The Dividend Allowance continues to fall, whilst the rate of tax on dividend income has become higher. This means that extraction of profits through dividend payment has become more expensive. Whilst in many cases, it may still be tax efficient to take profits as dividends rather than salary, the decision is becoming more nuanced.

Bonus: In some cases, it may be more efficient to extract profit as a bonus, for example where there are not sufficient retained profits out of which to pay a dividend at the required level, or where corporation tax is paid at the full rate.

Like salary, bonuses are subject to income tax and NICs for the director, and employer NICs for the company. The cut to employee Class 1 NICs from 12% to 10% from 6 January 2024, will make payment of a bonus less expensive. The full effect of the reduction will only be felt from 6 April 2024. For 2023/24, directors will pay a ‘blended’ annualised NICs rate of 11.5%.

The rules around timing can sometimes be used to advantage. For corporation tax, bonuses can be decided after the end of the company year, when final results are known provided that there is an obligation in place at the year end. They are still deductible in that year if paid within nine months. For income tax, there is scope to defer taxation of a bonus into a later tax year, or include in the current tax year, depending on how and when the bonus is declared. It is important to get the timing and procedure correct, and we can advise further.

Consider how to deal with directors’ loans

It is common for director-shareholders in family companies to have a loan account with the company. As most family companies are what are technically called ‘close companies’, this brings them within scope of the ‘loans to participator’ rules. This can mean a charge to corporation tax, often known as a s455 charge, if a director’s loan account is unpaid nine months after the end of the accounting period. For loans made on or after 6 April 2022, the charge is 33.75%.

Please do talk to us about the options for dealing with a director’s loan in your circumstances

Individual Savings Accounts: act by 5 April

Individual Savings Accounts (ISAs) are free of income tax and capital gains tax, and do not impact the availability of the Savings or Dividend Allowances. Although ISA limits have not increased this year, the tax benefits continue to be attractive.

There are four types of ISA: cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs.

The lifetime ISA can be used to buy a first home or save for later life. Funds are topped up by the government, which adds a 25% bonus, up to a maximum of £1,000 per year. After the age of 50, no payment into the ISA is allowed, and government top ups cease. Money can be withdrawn to buy a first home, on reaching age 60 or over, or if someone is terminally ill and has less than 12 months to live. In other circumstances, a withdrawal charge of 25% applies.

Rules and changes

The total that someone can invest in any tax year is set by the government. The limit has not changed for some years: the junior ISA limit is £9,000, and the limit for adults remains £20,000. The overall limit can be allocated across the various types of ISA available.

At present, it is only possible to subscribe to one of each type of ISA each year, but from 6 April 2024, multiple ISAs of the same type will be allowed each year, subject to the overall £20,000 limit. The exception to this is the Lifetime ISA. The limit here is £4,000.

Autumn Statement 2023 also announced some changes to the detail intended to widen the scope of investments permitted within Innovative Finance ISAs. These also take effect from 6 April 2024.

Anyone over the age of 18, who is resident in the UK can open an ISA. In the case of Lifetime ISAs, the applicant must also be under the age of 40. Crown servants and their spouses not living in the UK are also eligible. Junior ISAs are available for children under 18.

Until 6 April 2024, cash ISAs can be opened at the age of 16. From 6 April 2024, this changes, and applicants will have to be 18.

You cannot hold an ISA with anyone else: there is no facility for a joint ISA for spouses. You and your spouse have individual subscription limits, meaning that as a household you can invest a maximum of £40,000. Although you cannot hold an ISA on behalf of someone else, you can open and manage an ISA for someone in vulnerable circumstances, where they lack the mental capacity to do this for themselves. This can be done by applying to the Court of Protection for a financial deputyship order. In Scotland, application is to the Office of the Public Guardian in Scotland.

Tip: Act by 5 April

We recommend taking stock of your position before 5 April 2024. ISA limits can’t be carried forward into future years and are lost if not used in the tax year.

Consider the venture capital schemes 

Generous tax incentives exist to reward individual investors in young, higher risk companies not listed on a recognised stock exchange, which would otherwise struggle to access finance.

There are three ways to access such relief: by investing through the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and through Venture Capital Trusts (VCTs). Where the EIS and VCT rules contained sunset clauses, limiting tax relief to shares issued before 6 April 2025, recent legislation has now extended the operation of the schemes. This means that income tax and capital gains tax reliefs for investors in new shares issued before 6 April 2035 will continue to be available.

The potential for tax relief is considerable. With SEIS, for example, a qualifying investor can invest up to £200,000 in qualifying companies in a tax year, receiving income tax relief of up to 50% of the sum invested. Where shares are sold more than three years after the date on which issued, any resulting gain is also free of CGT. With EIS and VCTs, income tax relief of 30% is currently available on subscriptions for shares. There is also favourable capital gains treatment.

Obviously, this is a high-level overview, and close attention to the detail of the rules is needed. Please do talk to us for further details.

Keep up to date with pension planning opportunities 

It’s been a year of significant change for pensions, with developments impacting high earners and workers over 50, in particular.

• From 6 April 2023, the Annual Allowance (AA), increased from £40,000 to £60,000. The AA is the maximum tax-relieved pension saving that can be made each year without attracting a tax charge.
• Change around limits for the tapered AA. From 6 April 2023, the tapered AA applies where adjusted income (broadly net income plus employer pension input) is more than £260,000 (up from £240,000) and threshold income (broadly net income less pension contributions) is more than £200,000. For every £2 of adjusted income above £260,000, the AA is tapered by £1, until it reaches a specified minimum.
• From 6 April 2023, the minimum tapered allowance is £10,000, rather than £4,000.
• From 6 April 2023, the Money Purchase Annual Allowance is £10,000, rather than £4,000. This lower AA applies where someone has flexibly accessed a defined contribution pension.
• The Lifetime Allowance (LTA) charge was abolished from 6 April 2023, and the LTA itself is abolished from April 2024. The LTA has capped the total amount that could be built up in tax-relieved pensions savings. Until 5 April 2023, it was, in most cases, £1,073,100, though a higher limit applied where there was LTA protection.
• Excess lump sums above the LTA are now taxed at the marginal rate of income tax, (rather than a 55% tax charge).
• The Pension Commencement Lump Sum (the maximum tax free payment available on first accessing pension benefits) is now set at £268,275, except where protections apply.

Whilst welcome news, the tax position of high earners continues to be complex, and we would recommend reviewing the position on an individual basis. It is worth mentioning that pension planning for Scottish taxpayers can only become more significant with change to Scottish income tax rates and bands projected from 6 April 2024.

Making pension contributions remains one of the most tax efficient ways to invest for your future. Whether you are a director-shareholder, self-employed business person or partner, we would be happy to discuss this area with you further.

Capital gains tax (CGT) is charged at 10% (18% on residential property) for UK basic rate taxpayers; and 20% (28% on residential property) for UK higher and additional rate taxpayers. Scottish taxpayers pay CGT based on UK rates and bands, and therefore need to assess their position based on UK rates.

Maximise potential of annual exemption

The CGT annual exemption is set to fall to a new low this year, as announced in the Autumn Statement 2022. From 6 April 2024, the exemption is £3,000, rather than £6,000. Government figures suggest that by 2024/25, more than a quarter of a million more individuals and trusts will be within scope of CGT for the first time as a result. The change makes tax efficiency all the more important.

Each individual has their own annual exemption, so for couples, it makes sense to ensure that each party makes full use of this. In some circumstances, this may be achieved by transferring assets between you. Spouses (but not cohabiting couples) can usually transfer assets between them on a no gain/no loss basis for capital gains purposes. Where one spouse is a higher rate taxpayer, and the other has not made full use of their basic rate band, for instance, a transfer of assets has the potential to give access to the 10% tax rate, rather than the 20% tax rate. It is important that any transfer is outright and unconditional: do please talk to us beforehand to make sure your transfer is effective for tax purposes.

Review position for family home

If you sell a home that has always been your main or only residence for all the time that you have owned it, any gain should be covered by CGT Private Residence Relief (PRR). There are qualifying conditions for PRR: eligibility assumes, broadly, that the house is not let out; that no part of the home is used exclusively for business purposes; that the grounds, including all buildings, do not exceed 5,000 square metres in total; and that it was not purchased in order to make a gain.

The position is not always straightforward, however. Where, for example, a delay in selling means a property is let out and another purchased before the first is disposed of, the capital gains position can become complicated quite quickly.

Change in the last few years has reduced what is called ‘final period exemption’, which gives PRR for a specified period, even if someone is not living in the property. For property sold prior to 6 April 2020, this covered the final 18 months of ownership. Now it is only available for the final nine months of ownership. There are different provisions for someone who is disabled or in long-term residential care, and here PRR extends to the final 36 months of ownership.

Finally, it may be helpful to be aware that HMRC does sometimes challenge the availability of PRR. ‘Residence’ is not defined in the legislation. HMRC isn’t simply looking at how long a property is occupied. It’s looking for a ‘degree of permanence, continuity and the expectation of continuity’ to establish that a dwelling is being used as a residence, and what it calls the ‘quality’ of occupation is generally very important here. This extends to factors like sitting down for a meal, doing laundry and spending leisure time at a property.

Tip: More than one home?

Married couples can only count one property as their main residence for CGT purposes. This can be problematic if both parties are homeowners. In this situation, it’s possible to decide which of the two properties you wish to nominate as your main residence and notify HMRC of this. We can advise further.

Be aware of rules on cryptoassets

HMRC is increasingly on the look out for income and gains made from cryptoassets. Spring Budget 2023 announced that the design of the self assessment tax return is to be adapted to reflect this. From 2024/25, the capital gains tax pages will specifically ask for information on income and gains from crypto transactions.

The buying and selling of cryptoassets is usually treated as a personal investment, bringing it within the CGT regime. With the CGT annual exemption falling, it will become more important to monitor any crypto transactions you may make.

Latest developments

HMRC has recently launched a new service to allow someone to voluntarily disclose any unpaid tax on income or gains from cryptoassets, including exchange tokens, such as bitcoin, non-fungible tokens and utility tokens. The service is essentially designed to bring someone’s affairs up to date where transactions giving rise to capital gains were made in the past, rather than in the current tax year. We would always recommend professional advice before using HMRC disclosure facilities like this.

As well as providing a benefit to the charity or Community Amateur Sports Club (CASC) of your choice, donations under the Gift Aid scheme can provide a useful planning tool for donors.

Use Gift Aid to reduce taxable income

Payments under Gift Aid impact the calculation of your taxable income. This means they have the potential to keep income under key thresholds:

• High Income Child Benefit Charge (HICBC). For HICBC, clawback of Child Benefit payment begins where one of the couple has income over £50,000.
• Abatement of the personal allowance. If someone has adjusted net income more than £100,000, the personal allowance is tapered, and lost at the rate of £1 for every £2 over £100,000. If adjusted net income is £125,140 or more, the personal allowance is nil.
• Additional rate threshold in England, Wales and Northern Ireland: additional rate is charged on income over £125,140.
• Top rate threshold in Scotland: Top rate is charged on income over £125,140. From 6 April 2024, there will also be an Advanced rate of tax in Scotland, charged on income over £75,000 to £125,140.

Where income is close to any of these limits, a payment under Gift Aid could be very tax efficient.

Use flexibility on timing of relief

A carry back election can be made, meaning Gift Aid donations are treated as if made in the previous tax year. This can be of benefit where, for example, income is uneven; if perhaps you paid tax at a higher rate in the previous year. But there are strict time limits and procedures. A claim must be made on or before the date that the tax return for the previous year is filed; and not later than 31 January in the tax year that the gift was made. The claim must be made in the tax return: it cannot be made in an amended return. This means that the chance to make a carry back election is lost once a return is filed.

Tip: paying tax at more than basic rate?

Did you know that if you pay tax at more than basic rate, a payment under Gift Aid should result in a tax refund? This is because you are entitled to tax relief at your top rate of tax on the donation. This means you get the difference between the basic rate tax paid on the donation, and higher rate tax on the donation.

Take advantage of higher rate relief

Higher rate relief goes unclaimed by many donors. A repayment claim is made either via the self assessment tax return, or by asking HMRC to amend the tax code.

To make a claim, there should be a valid Gift Aid declaration in place for all gifts made. To back up the claim, appropriate records should be kept. These should comprise the date; amount of each gift; and the name of the recipient charity.

Take stock of new restriction

As part of the post-Brexit rearrangements, the government announced in the Spring Budget 2023 that tax reliefs and exemptions for charities were to be restricted to UK charities and CASCs. EU and European Economic Area (EEA) charities registered with HMRC for tax reliefs and exemptions at that date, however, have had a transitional period in which to continue claiming relief. This ends on 5 April 2024. The move means that money from UK taxpayers is used to support UK charities only. If you have previously supported charities in the EU or EEA, or perhaps have made provision for such a charity in the terms of your will, the position may need reassessing.

Here to help

Getting the tax relief right on charitable giving can be complex. We should be happy to advise further, especially where a carry back election may be of benefit.

Basis period reform

From 6 April 2024, there is a change to the way that business trading income is allocated to tax years for income tax purposes: ‘basis period reform’. This means that businesses are taxed on the profits arising in the tax year, rather than their accounting year. It impacts only unincorporated businesses — the self-employed and partnerships — and within these groups, it only affects those that do not use a 31 March or 5 April year end. It does not impact companies.

In the long run, the change is meant to mesh in with the Making Tax Digital for income tax programme, and provide a better digital experience. In the short run, for many businesses, it will accelerate the tax liability. The 2023/24 tax calculation for businesses not using 31 March or 5 April year end will be based on a longer period than usual: profits to the end of the normal accounting period, plus a proportion of profits from the end of the accounting year to 5 April 2024. Provisions exist to minimise the impact, by using overlap relief (where available), and spreading the ‘additional’ profits over five years. However, the change is still likely to mean higher tax bills in 2023/24 and following four years. There are also associated changes that will be needed to prepare yearly accounts and tax returns.

Tip: planning to minimise impact

For some businesses, the solution will be to change the accounting year end to 31 March; though this will not be an option for every business. It may not be viable for seasonal businesses, or those with international reporting requirements, such as large professional partnerships, for example.

The consequences of basis period reform will vary depending on your circumstances. We will be pleased to help you take stock of the position now, looking at the effect on cash flow, checking any possibility of being pushed into higher bands of income tax, and advising on damage limitation strategies where appropriate.