New Year Resolutions to Save Tax

Around this time of year, many of us have been thinking about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5 April 2023.

An obvious tax planning point would be to maximise your ISA allowances for the 2022/23 tax year (currently £20,000 each).

You might also want to consider increasing your pension savings before 5 April 2023 as the unused annual pension allowance from 2019/20 lapses after three years.

Many of us got together with the family over the Festive period and that prompted us to think about making or updating our Will.

Pension Planning

For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on their earnings. This limit covers both contributions by the individual and by their employer.

Under the current rules, the government adds to your pension contributions at the 20% basic rate.

For instance, if you save £4,000 in a personal pension the government tops this up to £5,000. If you are a higher rate taxpayer there is a further £1,000 tax relief when your tax liability is calculated, reducing the net cost to £3,000.

This can be even more tax efficient if your income is between £100,000 and £125,140 where the effective tax rate is 60%.

However, please remember that pension fund investments can go down as well as up.

Time to Review Your Will? 

For many individuals, at the top of their to do list for the New Year, is to make or update their Will. Many think this is something to leave until later in life, but it is important to get things in place once property is acquired or when children come along.

In the absence of a Will there are statutory rules which dictate how your assets are distributed on death. Those statutory intestacy rules may not be tax efficient and you might to want to make specific provision in your Will for your unmarried partner or for the guardianship of your children.

Passing on the Family Home

 When considering the wording of your Will you should note that the inheritance tax (IHT) nil rate band continues to be frozen at £325,000 until 2028. There is an additional residence nil rate band of up to £175,000 for passing on the family home to direct descendants on death. We can work with your solicitor to make sure that your Will is tax efficient.

Where the nil bands are unused on the death of the first spouse the balance is available on the death of the surviving spouse, potentially allowing a married couple (or civil partners) to pass on assets of up to £1 million without paying IHT.

The residence nil band is even available when you downsize to a cheaper property. For example, if a married couple currently live in a large house worth £500,000 and downsize to a flat worth £300,000, they could give away some of the proceeds during their lifetime and yet still benefit from IHT relief based on the higher valued property.  They could even sell the house and move into a rental property or a care home and still benefit from this additional relief. In these circumstances, certain conditions must be met, so please speak to us if you would like advice about this.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.