With the end of the tax year approaching, it is critical to make the most out of opportunities to maximise your reliefs and allowances.
The personal allowance for the 2023/24 tax year is £12,570 with the next £37,700 taxed at the basic rate of 20% (8.75% for dividend income). The higher rate tax of 40% (33.75% for dividends) is charged on income above £50,270 and the additional rate tax of 45% (39.35% for dividends) is charged on income above £125,140.
It should be remembered that:
- dividends are treated as the top slice of income, so the basic and higher rates are first allocated against other income.
- as the personal allowance is reduced by £1 for every £2 of income above £100,000, there is no personal allowance at all where income exceeds £125,140, effectively a 60% rate of tax on income between £100,000 and £125,140 and an effective rate of tax relief of pension contributions and gift aid donations of 60%.
Dividends
The timing of dividends from a private company or distributions from a family trust should be planned to fully utilise the personal allowance and basic rate band.
Personal Savings
The personal savings allowances of tax-free savings income are:
- Basic rate taxpayers – £1,000
- Higher rate taxpayers – £500
- Additional rate taxpayers – nil
Until 6th April the dividend tax allowance of £1,000 is available for all taxpayers, after 6th April it will reduce to £500. Amounts falling within the dividend allowance are taxed at 0%. However, the allowance will use any part of the lower rate bands that they would otherwise have fallen into. Dividends from ISAs are tax-free.
Gift aid and pensions
To mitigate the impact of the tapering of the personal allowance, gift aid donations and/or personal pension contributions can be made.
Married couples
In certain circumstances, married couples or civil partners can transfer 10% of their personal allowance between them by making an election.
This transfer is only available if one party is a non-taxpayer and the other is a basic rate taxpayer. To get the full benefit the non-taxpayer must have income of £11,310 or less. Tax relief is given via a tax reduction of 20% of the transferred amount, £1,260 for 2023/24.
Children also have tax free allowances that may be utilised, and the Settlements Legislation must be taken into consideration. Through family trusts, income from grandparents or other relations who are not the parents may be diverted to use a child’s personal allowance.
For those receiving child benefit, it should be remembered that taxpayers with adjusted net income in excess of £50,000 are liable to the high-income child benefit charge.
This charge will be levied on the higher earning partner. The charge is 1% of the full child benefit award for every £100 of income between £50,000 and £60,000. Where income is more than £60,000, effectively all child benefit is lost. You can elect not to receive child benefit if you or your partner prefer not to pay the charge.
Basis period reform
The Government has announced a reform of the basis period rules for sole traders and partnerships. From 2024/25 the profits of the tax year will be the profits arising in that tax year. The transitional year of 2023/24 will be the current year basis period profits plus the transitional period profits from the accounting year end to 5 April 2024.
Full relief will be given for any overlap relief and no further overlap can be created. Any additional profits arising for the business under the new rules will be spread over five tax years starting in 2023/24 with an option to elect to accelerate the tax charge.
This differs from the current year basis rules where a basis period for a tax year is the 12 months ending with the accounting date in that year, together with additional rules for the opening and closing years of a business or when there is a change in accounting period.
In some cases, this change will bring forward tax payments so it is essential to review the impact of this reform on your business.
To discuss any aspect please contact Neil Armstrong, Tax Director E: neilarmstrong@bakertillymm.co.uk T: 028 9032 3466