Get your finances in shape before the end of the tax year 2022/23
A new year has dawned, and there are just a matter of weeks left before the end of the tax year.
As usual, that means you need to familiarise yourself with a range of new rules, limits, and allowances. It’s really essential to be aware of this as now is the time to take advantage of left-over allowances that you have yet to use, or to prepare for new, higher taxes coming down the line. So, what is there to expect? We already know a good deal of what is coming but the Government is set to publish a Spring Budget which will take place on 15 March. While this won’t necessarily contain immediate measures, it could present some last-minute challenges for our finances.
With that in mind, here’s what we know is coming, and how to be prepared.
Things that are changing from 6 April
Capital gains tax
The Chancellor Jeremy Hunt announced a big change to the Capital Gains Tax (CGT) allowance in his Autumn Statement in November last year. The allowance has been slashed from £12,300 to £6,000 and is set to be slashed again in 2024 to just £3,000. The first cut will take effect from the new tax year, which means maximising what is left of the higher CGT allowance now is essential.
Dividend allowance
The Chancellor has also slashed the dividend allowance from £2,000 to £1,000, which will take effect from the new tax year. It will be slashed again in 2024 to just £500.
Other thresholds
The Treasury is freezing most other thresholds at their current levels for longer, including income tax and inheritance tax (IHT). This means that, while you won’t see a headline tax increase, if you receive a pay rise it will be worth less than it would have, had the thresholds moved up in line with inflation or average earnings. Jeremy Hunt also announced that the 45% additional rate of income tax will have a new lower threshold of £125,140 from 6 April. This means if you’re earning above that level, you’ll pay more in tax than you were before.
Things you can do to prepare
There are a number of straightforward mitigating measures you can take to shield your wealth and income from these changes. Here are some ideas to get you started.
ISAs
ISAs are something of a miracle product, shielding you from any tax liability for things such as dividends or capital gains tax (CGT) that you would normally have to pay if you invested using a standard account. The annual £20,000 ISA limit is extremely valuable for wealth growth and preservation, and so it’s sensible to make as much use of it as you can, be it cash or investment ISAs. ISAs are the single best way to avoid the punishing implications of dividend and capital gains tax (CGT) allowance cuts as the tax wrapper on the account protects you from any tax implications whatsoever.
Pensions
Before you get to your ISA, you’ll want to make sure you’re contributing as much as possible into your pension. The annual allowance is £40,000 and comes with extremely valuable tax relief. This tax relief makes contributing to a pension more attractive than an ISA in the first instance as upfront extra money will help grow your savings pot larger over time. However, pensions do have implications when you begin looking to draw down wealth, including when you can access the money, how much you can get tax free and the size of the pot, making them somewhat of a more complicated vehicle than the ISA.
JISAs
Junior ISAs or JISAs are often overlooked but are also an extremely valuable allowance you can call upon. Ultimately, when we think about building wealth over a lifetime, a big consideration in that is what we leave behind for our children. Before getting into inheritance tax (IHT) considerations, contributing to a JISA for a child under 18 can be a great way to begin passing some of this wealth on as early as possible, while setting up your child for a prosperous future at an early age. The current annual JISA allowance is £9,000 and this will remain unchanged in the new tax year.
Inheritance tax allowances
Inheritance – or so-called ‘Death tax’ – is the most hated of all Government levies. However, there are various allowances and carve-outs available allowing you to limit your potential liability. The main one is the annual gifting allowance. You can gift up to £3,000 tax-free to anyone each tax year, which resets each 6 April. There is also a seven-year rule on giving away wealth, so the earlier you begin to prepare that process, if it’s something you’re considering, the better. As a parent you can also make a £5,000 wedding gift, or £2,500 if you’re a grandparent – although this is contingent on when your child/grandchild gets married rather than the tax year in particular!