The current tax year ends on 5 April 2024 with the 2024/25 tax year kicking off a day later. With the end of the tax year approaching, it’s a good idea to begin to plan what you need to do to ensure your taxes are in good shape. Peter Webb, our Head of Tax Advisory, shares his top tips.
Before considering what you might need to do before 6 April 2024 to make sure your taxes are in good shape, it’s interesting to consider why the UK tax year falls when it does. The UK adopted the Gregorian calendar in 1752, almost two centuries after most of the rest of the world. This calendar was first introduced in October 1582 following a papal bull issued by Pope Gregory XIII. To adopt the same approach Britain had to shift its calendar by 11 days, moving the start of the year from the 25 March to 5 April. This went off without a hitch until 1800 which wasn’t a leap year under the Gregorian calendar but would have been in the old British calendar. To compensate the Treasury moved the start of the year from 5 April to 6 April to compensate. And things remain unchanged today!
Steps to take before 6 April 2024
Step 1 – maximise your ISA
Have you used all your available ISA allowances? Savings and investments held in an Individual Savings Account (ISA) grow free of Income Tax and Capital Gains Tax. Adults can contribute £20,000 each year and children £9,000 each year, but you do need to be UK tax resident to make use of the scheme. If you haven’t used all your allowance, it’s a worthwhile first step.
Step 2 – check your pension
Pensions are tax-efficient investments. The annual allowance for pension savings has increased to £60,000 this year for the highest earners so it’s useful to calculate how much you are able to contribute to your pension fund in the tax year. Currently there are no penalties for exceeding the lifetime allowance for pension savings (although a Labour government could reintroduce those charges). Therefore, topping up your pension fund could be beneficial depending on your circumstances.
Step 3 – use your tax allowances
Your tax allowances are generally available on a ‘use it or lose it’ basis each year. There are allowances for Income Tax, dividend income, interest income, Capital Gains Tax and various Inheritance Tax allowances, so check whether you’ve made use of everything you can. Bear in mind that the tax free dividend allowance is being halved next year to £500 and the Capital Gains Tax annual exemption is also being reduced by the same proportion. So, make sure to review your investments to take into account these reduced tax allowances for the next tax year.
Step 4 – reduce your tax bill
Calculating your tax liability for 2023/24 will allow you to work out whether you can take action to reduce your tax bill. Some investments can act to reduce Income Tax and sometimes even defer or mitigate Capital Gains Tax. Venture Capital Trust Scheme, Enterprise Investment Scheme and the Seed Enterprise Investment Scheme all have unique tax advantages, which could help you better manage your tax bill. For example, by investing £100,000 in a qualifying EIS investment, you would be able to reduce your Income Tax bill by £30,000.
Using your pension is a very effective way to reduce the marginal rate at which you pay Income Tax. For example, your Income Tax personal allowance is lost at the rate of £1 for every £2 that your taxable income exceeds £100,000. The effective rate of tax in the band where your personal allowance is withdrawn is an eye watering 60%. If you can take action to reduce your taxable income to below £100,000 by making a pension contribution (for example), you could make a 60% tax saving.
Step 5 – check your domicile
If you’re non-UK domiciled and living in the UK check whether you’ll be caught by the deemed domicile rules. These apply when a non-UK domicile has been UK tax resident in 15 out of the previous 20 tax years. If so, you may be able to take action to reduce your tax bill before any deemed domicile status kicks in. You may be able to adopt the ‘remittance basis charge’ which excludes your overseas income and gains from UK tax provided various conditions are met. Once you’ve been UK tax resident in seven out of the nine previous tax years (including part years) an annual charge of £30,000 applies if you continue to use this special basis of taxation. The charge increases to £60,000 once you have been UK tax resident in 12 out of the previous 14 tax years, including part tax years.
These are just some ways in which you may be able to improve your tax position before the start of the next tax year. Please get in touch with your nearest office to review your circumstances and make sure you’re in the best shape for the next year.