With taxes at a 70-year high and frozen thresholds pushing more and more people into higher tax bands, making the most of allowances has never been more important.
According to HM Revenue & Customs, 301,000 more people could become additional rate taxpayers by 2027/28, while many more who remain within their tax bands will pay more income tax and national insurance due to frozen allowances.
Most of the income tax allowance and rates have been frozen at their current levels until 2028, after chancellor Jeremy Hunt extended the freeze in his Autumn Statement in November.
In addition, 235,000 more people could be forced to report their capital gains after the annual capital gains tax exemption is reduced by £6,300 this April.
Anthony Whatling, tax partner at wealth manager Evelyn Partners, said this was one of the most decisive tax-year ends in decades, meaning it's time for savers and investors to review their tax position.
"Many allowances are calculated on a yearly basis, so a pre year-end review can help to identify any potential tax savings, with the changes afoot.
"Even if it’s too late to take some steps by the end of this tax year, tax planning is a year-round exercise, and it pays to look well ahead."
Whatling has pointed to seven areas that could prove fruitful when it comes to last minute tax savings:
1. Reducing taxable income and the 60 per cent trap
The highest rate of tax is 45 per cent, applying to individuals with a total income of more than £150,000.
Personal allowances are tapered for individuals with incomes between £100,000 and £125,140 (2022/23), giving an effective tax rate in this band of 60 per cent.
Whatling says earners can help reduce taxable income in a number of ways:
- making pension contributions or charitable gift aid payments;
- transferring income-generating assets between spouses/civil partners;
- using tax-free investments and/or tax efficient investments;
- investing in assets which generate capital growth rather than income; and
- altering the timing of income to maximise use of lower rate bands.
From April 2023, the additional rate threshold will be reduced to £125,140, meaning that anything over the effective 60 per cent rate band will be taxed at 45 per cent.
This provides an additional incentive for some taxpayers to move income to the current tax year, although it will also accelerate the resulting tax payment.
In Scotland, where income tax will rise 1 per cent in the higher and additional rate bands in 2023/24, this becomes more significant.
2. Pension contributions – using the annual allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at a person's highest marginal rate of income tax.
This benefit is accentuated in payroll systems that also afford relief against national insurance contributions, for instance salary sacrifice, says Whatling.
Tax relief is restricted to the lower of a person's annual allowance (typically £40,000) and what is known as their net relevant earnings.
Earners may also be able to take advantage of any unused annual allowance from the previous three tax years to make additional pension contributions under the “carry forward” rules.
"This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so advice can often be useful," says Whatling.
"There is a risk of future changes to this reasonably generous relief, meaning it is worthwhile considering taking full advantage of the current allowances now."
