The financial year ends on the 5th of April, in the UK. With this comes a reset of tax allowances. What does that imply? It means that you lose all your unused tax allowances. This means it is time to turn our attention to a crucial aspect of financial planning: tax relief.
The UK tax system offers several opportunities for individuals and businesses to reduce their tax liabilities.
In this blog, we will explore 5 tax year end tips or essential tax reliefs that you can take advantage of before the tax year ends.
Why Do Taxes Matter?
Taxes can significantly impact one's ability to build, maintain, and grow wealth. Mismanagement of taxes can erode wealth over time.
Tax rates can be as high as 45% significantly eroding your income. Hence having a well-structured tax strategy is important.
An effective tax strategy can optimize savings, investments, and retirement planning. For an effective strategy make sure that you take note of the end of year tax tips for business that we will discuss in this blog.
What are the Major Types of Taxes?
To understand tax reliefs and tax planning, we need to understand the major types of taxes. There exist primarily 3 categories of taxes:
- Income Tax: It is applied to your income. This levy ranges from 0% to 45%. It is also applicable to savings, dividends, and interest income.
- Capital Gains Tax: This tax applies to gains or profits from investments. It ranges from 10% to 28%. It also becomes relevant when selling a secondary property, excluding your primary residence.
- Inheritance Tax: This tax is set at 40%.
What are Tax Reliefs?
Tax reliefs are specific provisions or incentives provided by a government through its tax system to reduce the tax burden on individuals, businesses, or certain activities.
The UK taxation system has around 1,000 tax reliefs available. To avail of these, certain conditions need to be met.
HM Revenue and Customs (HMRC) distinguishes between two broad categories of tax reliefs:
- Structural Tax Reliefs: These reliefs serve essential functions within the tax system itself. They play roles in delineating the tax's scope and ensuring accurate calculations of income and profits.
- Non-Structural Tax Reliefs: These reliefs are specifically crafted to support or promote particular individuals, activities, or products, often with the aim of achieving economic or social goals. Their primary purpose is to incentivize or facilitate actions that align with these objectives.
When Should You Start Planning Your Taxes?
Immediately.
Yes. Ideally, you should not delay planning your taxes towards the end of the year. Commence your tax planning at the start of the year.
This will ensure that you do not forget to take advantage of all the allowances and reliefs available and reduce your tax liability to the minimum.
But with your hectic lifestyle it is possible that you forget to do so. Then, make sure that you get the advantage of tax year end tips.
5 Tax Year End Tips to Reduce Your Tax Liability
1. Individual Savings Account (ISA)
The first tax year end tips relate to your Individual Savings Account (ISA). Everybody has an option to save up to £20,000 in an Individual Savings Account. This allowance can be used in several ways:
Putting the entire sum into a single ISA account or
Distributing it across different types of ISAs, such as cash ISAs, stocks and shares ISAs, and innovative finance ISAs.
Any interest earned on cash held within an ISA is tax-free. Moreover, any income generated or capital gains realized from investments held within ISAs are also not subjected to any taxation like capital gains tax.
If you use your ISA allowance to invest in stocks and shares, there is no liability to pay dividend tax or capital gains tax.
If you have not yet fully utilised your ISA allowance then the foremost financial year tax end tips would be to take the complete benefit of this provision. By doing so, you can optimize your tax position and benefit from the tax reliefs offered by ISAs.
2. Pensions
Another one of the main tax year end tips is maximising your contribution towards your pension before 5th April. You can receive tax relief on private pension contributions up to 100% of your annual earnings.
The tax relief for pension contributions could either be automatic or you will have to avail it. In the following 2 pension schemes the relief is automatic:
- Workplace Pensions: In workplace pensions, your employer deducts your contributions from your salary before Income Tax is calculated. This ensures automatic tax relief.
- Relief at Source: Some schemes, like personal or self-invested pensions, employ a "relief at source" system. Here, your pension provider claims tax relief at the basic 20% rate from the government and adds it to your pension pot automatically.
Certain overseas pension schemes are also eligible for tax relief in the UK. To know more about these, visit the government’s website.
When you maximise your pension contributions, you effectively lower your income tax liability. Currently, the tax-free annual earnings allowance stands at £12,570. However, this allowance is reduced by £1 for every £2 earned over £100,000.
This is where you can use your pension contributions as a strategic tool. If your pension contributions are sufficient to keep your annual income below the £100,000 threshold, you can still benefit from the full personal allowance.
3. Capital Gains
A notable tax year end tip UK relates to capital gains. When you earn a profit from an investment or the sale of a second property, you may be subject to capital gains tax (CGT).
Everyone in the UK has a capital gains tax allowance of £6,000 per year. This amount is called the annual exempt account.
For trusts, this amount is £3,000.
This means capital gains earned up to £6,000 are not subject to any taxation. If your capital gains exceed this amount, only then you will have to pay tax on it.
So, if you have sold any of your assets, make sure that you avail of this benefit.
4. Charity Donations
This is an important end of year tax tip for business. Any donations made to charity or CASCs (Community amateur sports clubs) are free of taxes. The tax relief will depend upon the donation method used.
When you sign a Gift Aid declaration, the charity can reclaim the basic rate tax, currently 25p for every £1 donated. You won’t incur any extra cost.
If your employer or pension provider offers a Payroll Giving scheme, you can donate from your salary or pension before tax deductions. This can reduce your taxable income. Tax relief will depend upon your tax rates.
You can also receive income tax relief by giving qualifying assets like shares, unit trusts, and land to charity. Gifts of assets to registered charities are exempt from capital gains tax.
If your Income Tax rate is above the 20% basic rate (currently for earnings over £50,270), you can claim back the extra tax paid on your charitable donations.
For this, report your donations on your self-assessment tax return. If you don't file a self-assessment, inform HMRC about your donations separately to ensure you receive the tax relief you are entitled to.
5. Dividend Allowance
Another important end of year tax tips relates to dividend allowance. If you own shares in a company, you may receive dividend income as a shareholder. For the tax year starting from April 6, 2023, to April 5, 2024, the dividend allowance is £1,000.
This means that dividends earned up to £1,000 are tax-free.
Your dividend income within your Personal Allowance, which is the income threshold below which you don't pay tax, is entirely tax-free.
Dividends received from shares held in an ISA (Individual Savings Account) are also tax-exempt.
The amount of tax you pay on dividends above the dividend allowance depends on your total income and income tax band. These rates are as follows:
|
Tax Band |
Tax rates on dividends earned above the dividend allowance |
|
Basic rate |
8.75% |
|
Higher rate |
33.75% |
|
Additional rate |
39.35% |
If you have not taken advantage of this tax relief, make sure that you do so.
We Can Help You – Connect with Us
UK taxpayers can avail of several tax reliefs. There are around 1000 reliefs under the UK taxation system. Hence, it is important to be aware of the tax reliefs you are eligible for to claim your tax reliefs accurately.
This will help you optimise your taxes and ensure that you do not leave your hard-earned money on the table.
If you require any assistance or advice for your tax relief, do not hesitate to get in touch with our London Accountant. With several years of experience helping small and medium businesses, we can help you with all your issues relating to your tax reliefs.
To speak to our experts call us at 020 8064 0454 or e-mail us at dream@unicornaccountants.co.uk and we will get in touch with you at the earliest.