Your 2022 / 2023 Tax Year End Checklist

2022 was an unusual year in many ways. In the UK the year saw three Prime Ministers, four Chancellors, but no formal Budget. That may come as a surprise, but, despite a plethora of Parliamentary Statements from the assorted Chancellors, none counted as a Budget. Admittedly the press did not help by branding some of the announcements as ‘mini-Budgets’, particularly the meltdown that was Kwasi Kwarteng’s ‘fiscal event’ (using his preferred terminology).

The absence of a Budget was all the stranger when the billions of spending and/or tax cuts announced outside the formal framework are considered. In financial terms, many of 2022’s non-Budgets were larger than the real thing, and, arguably, more consequential.

As something approaching normal service resumes in 2023, on Wednesday 15 March the first bona fide Budget since October 2021 was presented to Parliament. You can read a summary of the announcements made here.

Probably of more relevance to you and most other taxpayers will be what happens three weeks after the Budget on 5 April 2023, when the 2022/23 tax year comes to an end. At that point the personal tax landscape alters, with the revenue-raising measures in the Autumn Statement coming into effect at midnight. Those changes make tax year end planning this time around more important than it has been for some years. The sooner you start on this – and planning for the higher tax world of 2023/24 – the better.

For 2022/23 the list of areas to consider has echoes of earlier years, but that does mean the actions to be taken – or not taken – are also similar:

Pensions

5 April 2023 is the final date for taking advantage any unused pension annual allowance (of up to £40,000) dating back to 2019/20. As the calculations involved can be complex, especially if you are or have been a member of a final salary scheme, the sooner you begin this element of planning, the better.

Beyond making use of any unused 2019/20 annual allowance before the opportunity is lost, this tax year’s pension contribution planning is more complex than usual because:

• The higher rate income tax threshold will be frozen next tax year and the additional/top rate threshold will be cut from £150,000 to £125,140. In Scotland both the higher rate of tax and the top rate of tax will also rise by 1% to 42% and 47% respectively. Thus, in some instances, you could receive more tax relief by deferring all or part of your pension contribution until after 5 April. HMRC estimate that there will be about a quarter of a million more additional rate taxpayers in 2023/24.

• The lifetime allowance (£1,073,100 unless you have any protection for a higher figure) has been frozen since 6 April 2020 and is not due to increase again until at least 6 April 2026. Even then, the increase is only scheduled to be the previous year’s inflation. If the value of your pension benefits exceeds your available lifetime allowance, you could end up suffering 55% tax on the excess. It is therefore wise to estimate the chance of breaching the lifetime allowance before you make any contribution.

Individual Savings Accounts (ISAs)

2023/24 will not only see income tax thresholds frozen or fall, but will also mark:

• A halving of the dividend allowance to £1,000, to be followed by another halving to just £500 from 2024/25 onwards. Beyond the dividend allowance, tax on dividends is now 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).

• The first of two dramatic cuts in the capital gains tax (CGT) annual exemption, taking it down from the current £12,300 to £6,000 in 2023/24. It will then halve to £3,000 from 2024/25 onwards. Broadly speaking, CGT is charged at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers, with a further 8% added where residential property is involved.

These turns of the investment tax screw add to the attractiveness of ISAs. As a reminder, all ISA offers four (increasingly) valuable tax benefits:

• Interest earned on fixed interest securities and cash is free of UK income tax

• Dividends are also free of UK income tax

• Capital gains are free of UK Capital Gains Tax

• ISA income and gains do not have to be reported on your tax return

Until now, for most basic rate taxpayers, the combination of the £1,000 personal savings allowance, £2,000 dividend allowance and £12,300 CGT annual exemption has meant that ISA tax benefits have been largely academic. However, much higher interest rates, the quartering of the dividend allowance and the sharp cuts to the CGT annual exemption have changed the situation. At the current base rate of 4%, a deposit of £25,000 is enough to reach the personal savings allowance. Similarly, based on today’s dividend yield on the UK stock market, a £15,000 shareholding will produce dividends greater than the £500 dividend allowance due to arrive from 6 April 2024. There is a case for investing in an ISA now even if it does not save you tax immediately as it may well do in the future if your savings grow.

The maximum total contribution to ISAs is £20,000 per tax year, a figure unchanged since 2017/18 and not due to increase in 2023/24. For Junior ISAs, the maximum is £9,000. There are no carry forward provisions: use it or lose it!

Capital Gains Tax (CGT)

When he was Chancellor, Rishi Sunak commissioned a review of CGT from the now disbanded Office of Tax Simplification (OTS). It produced a range of proposals, the more radical of which Mr Sunak rejected. However, last November Mr Sunak’s next-but-two successor, revived the abandoned idea of sharply reducing the CGT annual exemption, as explained above.

One consequence is that it is more important than in past tax years that you review whether to use your annual exemption before 6 April, when it falls from £12,300 to £6,000. Although 2022 was a down year in most markets, you may well have gains accumulated from earlier years which can be offset against the annual exemption. Unfortunately, any unused annual exemption cannot be carried forward to a future tax year.

Anti-avoidance rules mean that you cannot sell holdings one day and buy them back the next to take advantage of the annual exemption. However, there are alternatives to achieve a similar outcome, such as reinvesting your sale proceeds via an ISA or a pension.

Inheritance Tax (IHT)

Inheritance tax (IHT) Is another tax which Mr Sunak flirted with changing after OTS reports, but eventually left virtually untouched. However, that may be because he chose to freeze the nil rate band and residence nil rate band until 5 April 2026, a period that was extended by another two years in Jeremy Hunt’s Autumn Statement. The main nil rate band was set at its current level in April 2009 and had it been index linked since then, in 2023/24 it would be about £465,000.

The prolonged freeze has dragged a growing number of estates into the IHT net and added to the tax bill of those already within it. IHT receipts in 2021/22 were more than double those of 2009/10. One way to reduce the tax’s impact on your children (and grandchildren) is to use the yearly exemptions which are available:

1. The annual exemption. Each tax year you can give away £3,000 free of IHT. If you did not use all the annual exemption in 2021/22, you can carry forward the unused element to this year (and no further), but it can only be used after you have used the current tax year’s annual exemption. For example, if you made no gifts in 2021/22, and you gift £4,000 in 2022/23, you will be treated as having used your full 2022/23 exemption and £1,000 from the previous tax year.

2. The small gifts exemption. You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 annual exemption.

3. The normal expenditure exemption. The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one which the OTS wanted to replace. Under the exemption, any gift – regardless of size – escapes IHT provided that:

 a.    You make it regularly

b.    It is made from your income (including ISA income but excluding investment bond and other capital withdrawals)

c.    The sum gifted does not reduce your standard of living

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

The constraints imposed on pension contributions by the lifetime and annual allowance and the rising numbers of higher rate taxpayers have prompted a growing interest in venture capital trusts (VCTs) and enterprise investment schemes (EISs). In 2021/22, VCTs attracted over £1,100 million of fresh investment, 68% more than the previous tax year. Subject to generous limits, both VCTs and EISs offer:

• Income tax relief at 30% on fresh investment, regardless of your personal tax rate; and

• Freedom from CGT on any profits.

While VCTs and EISs offer attractive tax reliefs, they should not be regarded as an alternative to pensions for retirement planning. Over the years, the tax framework for VCTs and EISs has been honed to ensure the schemes focus on investments in small, relatively young, high risk companies. That is not an area you would normally be advised to choose for your pension arrangements.  

Business Income Planning

If you are a shareholder director in your company, it may be worth bringing forward the payment of any dividend or bonus into this tax year, rather than leaving it until after 5 April. However, the decision is not clear cut because of all the tax changes that have and will take place.

In favour of early payment:

• The reduction in the dividend allowance

• The frozen higher rate threshold

• The reduced additional/top rate threshold

• The one percentage point increase to higher and top rates in Scotland

In favour of deferral:

• Increased corporation tax rates for companies with gross profits of over £50,000, including a new marginal rate of 26.5% on profits between £50,000 and £250,000

• For directors, the effective corporate and personal National Insurance contribution (NIC) rates fall in 2023/24

To see the effect, consider an English resident higher rate taxpaying director whose company profits are £100,000 in both the year ending 31 March 2023 and the following year. If their personal investments generate £1,000 dividend income and they wish to draw out £10,000 of gross profits, the picture looks like this: