Tax year end planning

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• Using the annual allowance
• Tax advantages of pension contributions

Using the annual allowance

The March 2023 Budget increased the annual allowance to £60,000 from 6 April 2023, this means that someone with the relevant earnings could contribute £60,000 and gain tax relief. If they contribute more, they will need to use carry forward to avoid an annual allowance charge.  

Tax relieved pension contributions above £3,600 gross are restricted to relevant UK earnings. Where income comes largely from dividends, clients may not have the net relevant earnings to utilise the annual allowance. Some clients may instead be able to arrange additional employer contributions to use the allowance.  

The increased annual allowance means that those with a significant pension input, especially where there is little control over this, such as defined benefit accrual will face a smaller annual allowance charge compared to previous years. 
 

Carry forward 

Your clients may be able to carry forward any unused annual allowances from the previous three tax years and add these to the allowance for the current tax year. This means that for the 2023/24 tax year, up to £180,000 (£60,000 for 2023/24 and £40,000 from the three previous years) could be payable without breaching the annual allowance. 

Remember pension contributions in those years limit the amount of carry forward available. If the annual allowance was exceeded in any of those three years, you need to look at the three years preceding that tax year to see if the annual allowance from those years was used or already carried forward to a previous tax year.  

Any available carry forward from the 2020/21 tax year will be lost if it is not utilised in the 2023/24 tax year.

Clients can’t carry forward relevant earnings from previous tax years to increase earnings in the current tax year.  
 

Tapered annual allowance 

Higher earners may have their annual allowance reduced if their income exceeds £260,000. There are a number of checks to validate if the taper applies, but this can see the annual allowance reduced to £10,000. Find out more about the tapered annual allowance.  

Carry forward can be used where the taper applies, but you should also consider whether the taper applied in previous tax years, and then review the contributions in that year to see what remains to be carried forward. For tax years 2020/21 through to 2022/23 the taper may apply if income exceeds £240,000, and the annual allowance could be reduced to a minimum of £4,000.  
 

Avoiding the tapered annual allowance 

For higher earners, in the 2023/24 tax year - the tapered annual allowance will apply if an individual’s threshold income exceeds £200,000 and their adjusted income is more than £260,000.  

Threshold income is reduced when making contributions to a personal pension scheme. This means that contributions to a pension can reduce your client’s threshold income to, or below £200,000, so that the annual allowance is not tapered, regardless of their adjusted income.  

If your client’s annual allowance would be significantly reduced because of the taper, then making pension contributions can maintain the annual allowance in full, therefore preventing or reducing an annual allowance charge. 
 

Money Purchase Annual Allowance (MPAA) 

Anyone that has already taken flexible income, or an uncrystallised funds pension lump sum (UFPLS) will be subject to the money purchase annual allowance of £10,000. Individuals will still have the £60,000 annual allowance for defined benefit accrual but will otherwise be limited to contributions of £10,000 into money purchase pensions.  

It’s not possible to use carry forward to increase the MPAA. However, carry forward can continue to apply to defined benefit accrual. Most of the planning opportunities involve contributions into money purchase pensions, so there are fewer opportunities once the MPAA applies. 
 

Enhanced protection 

With the removal of the lifetime allowance from 6 April 2024, clients with enhanced protection will have their lump sum and death benefit allowance limited to the value of their uncrystallised rights on 5 April 2024. These clients have been able to contribute to their pensions since 6 April 2023 without losing their protection, so can increase their lump sum and death benefit allowance before the end of the tax year.  
 

Tax advantages of pension contributions

In addition to increasing retirement investment in a tax efficient way, pension contributions reduce your adjusted net income. 

This can be helpful to: 

• Reclaim the personal allowance where income exceeds £100,000.  
• Reduce or eliminate the high-income child benefit charge.  

Personal allowance (avoiding the 60% tax trap) 

Income between £100,000 and £125,140 is taxed at 40%, with an additional effective rate of 20% tax because of the removal of the personal allowance where income moves from being tax free to taxed at 40% (the personal allowance is reduced by £1 for every £2 of income above £100,000). This is referred to as the 60% tax trap. In Scotland, this effective tax rate is 63% in the 23/24 tax year, increasing to 67.5% in the 24/25 tax year.  

If clients pay more into a pension before the tax year end, this will reduce their adjusted net income.   

If Ted is approaching tax year end and has an adjusted net income of £110,000.  

Taking no action: 

• Their personal allowance will be reduced by £5,000, therefore an additional £5,000 will be taxed at 40% instead of being tax free.
• The £10,000 in excess of £100,000 is taxed at 40%.
• Resulting in £6,000 tax from this £10,000 income 

Paying a further £10,000 gross into a pension:

•  Adjusted net income is reduced to £100,000.
• The personal allowance will be retained in full, so the £5,000 shown above will be tax free.
• The £10,000 in excess of £100,000 taxed at 40% is directed to a pension, so the tax and tax relief offset.
• The £10,000 contribution effectively gives 60% tax relief, with £4,000 less in hand after tax.  

You should check there will not be any annual allowance charge due to making additional pension contributions.  

High income benefit charge 

Where clients are claiming child benefit, the high-income benefit charge applies at a rate of 1% of the amount of Child Benefit for every £100 of income over £50,000. 

Income more than £60,000 results in the charge recovering all the child benefit. Reducing adjusted net income below £60,000 will reduce the charge, or to below £50,000 will remove the charge completely. Pension contributions reduce your adjusted net income so can be used to avoid this charge and accrue retirement savings at the same time.
 

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• Capital Gains tax (CGT) 
• Savings and dividends
• Inheritance tax (IHT)
• Individual Savings Accounts (ISAs)

Capital Gains tax (CGT)

In November 2022, the Chancellor announced a staggered reduction in the CGT annual exempt amount. From 6 April 2024 this amount will reduce again from £6,000 to £3,000, for individuals and £3,000 to £1,500 for some trusts. HMRC estimate that up to 260,000 individuals and trusts will be brought into scope for CGT, for the first time. 

Basic rate taxpayers pay 10% and higher and additional rate taxpayers pay 20% on any gains, except where the gain relates to property which is taxed at 18% and 28%.  

With the reduction to the annual exempt amount, CGT planning has become more important than ever. You may want to consider the following before 6 April: 

• Use of the full annual exempt amount – any unused amount cannot be carried forward to future tax years.  
• Gains in this tax year can be offset against any losses made over the last four tax years, provided those previous losses have been notified to HMRC. 
• Transferring an asset to a Spouse/Civil Partner is exempt from CGT.  If the Spouse or Civil Partner isn’t realising any other gains, they could crystalise gains within the annual exempt amount to make full use of both allowances, up to £12,000 this tax year but reducing to £6,000 in the new tax year. 

Savings and dividends

The tax-free dividend allowance is reducing again from £1,000 to £500 from the 6 April. 

Personal savings allowance - Depending on the tax position of your client, they will be entitled to an allowance of either £1,000, if a basic rate taxpayer, or £500 if they are a higher rate taxpayer.  An additional rate taxpayer is not entitled to this allowance.  

Restructuring your clients’ assets can assist them to maximise the full use of their dividend and personal savings allowances. 
 

Inheritance tax (IHT)

While we wait to hear what IHT reform, if any, may be announced in the March 2024 budget, your clients can still take advantage of the current allowances. Useful exemptions available to individuals who may have surplus cash or assets to give away, these include: 

Annual exemption – individuals can make a gift of up to £3,000 per tax year.  Any unused allowance from the previous tax year can be carried forward one tax year. If it is not used, it will be lost. 

Normal expenditure out of income – this is probably one of the most under used and useful IHT exemptions. There are three conditions which must be met to qualify for this exemption: 

1. Gifting must be habitual – the frequency, amount and recipient of the gift should form a habitual pattern of gifting.  
2. The gift must be made from income – all forms of income are allowable. Be aware that withdrawals from an investment bond are regarded as payments of capital and will not fulfil this condition.   
3. The donor must be able to maintain their usual standard of living.  

Gifts should be habitual so it’s never too early to start the gifting habit if your clients have surplus income.  

HMRC will determine whether the gifts made under this exemption are allowable. It is therefore important for the donor to keep accurate records of the gifts made and the impact, if any, on their usual standard of living. The Executors must supply this information to HMRC when the donor dies. 
 

Individual Savings Accounts (ISAs)

ISAs can be an important part of any investment portfolio because they offer tax free savings on all income and gains generated within it. As the tax efficiency of directly held investments reduces, these benefits are more important than ever.  

Investors can subscribe up to £20,000 each tax year into a Cash ISA and Stocks and Shares ISA or a combination of both. Any unused allowance can’t be carried forward to future tax years, so you may want to consider maximising your clients’ subscriptions before they are lost. 

If your client has a flexible ISA and they have taken money from it this tax year, they can re-invest the amount withdrawn without affecting their annual subscription amount, provided this is done before the end of the tax year.