The 2022/23 tax year ends on Wednesday 5 April.
After this date, many allowances will reset, so it could be the last chance to use some of them.
Here are seven allowances to consider using before the 2022/23 tax year ends.
1. Marriage allowance
2022/23 allowance: up to £1,260
Using the Marriage Allowance could reduce an Income Tax bill by £252
The Marriage Allowance allows a spouse or civil partner to give some of their unused Personal Allowance to their partner.
The Personal Allowance is the amount of income that can be received before Income Tax is due. For the 2022/23 tax year, it is £12,570.
If a couple has an income below this threshold, the person with the lower income may be able to pass on up to £1,260 of their Personal Allowance. This effectively increases the Personal Allowance of their partner to £13,830. This could then reduce their tax bill for the 2022/23 tax year by £252.
To be eligible the couple must be married or in a civil partnership. The partner with the higher income must also pay Income Tax at the basic rate in England, Wales, or Northern Ireland. This usually means their income is between £12,571 and £50,270.
In Scotland, the higher income earner must pay the Scottish starter, basic, or intermediate rate of Income Tax. This usually means their income is between £12,570 and £43,662.
Marriage Allowance can be backdated for up to four years. So, the couple have until 5 April 2023 to use their entitlement from the 2018/19 tax year.
Please note: HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
2. ISA allowance
2022/23 allowance: £20,000
An ISA provides a tax-efficient way to save and invest.
The interest or returns earned on money held in an ISA are free of both Income and Capital Gains Tax (CGT). For the current tax year, up to £20,000 can be added to an ISA.
An annual allowance can be spread across several different ISA types.
For adults, there are five different types of ISA that can be contributed to:
- Cash ISA: a Cash ISA operates similarly to a savings account, but the interest earned is paid free of Income Tax and CGT (Capital Gains Tax). Some Cash ISAs are subject to restrictions, such as how much can be withdrawn.
- Stocks and Shares ISA: Using a Stocks and Shares ISA allows investment in the stock markets and other assets. Returns are free of Income Tax and CGT. As with all investments, a long-term outlook is best and an understanding of risk profiles is needed when using a Stocks and Shares ISA.
- Lifetime ISA (LISA): LISAs can be opened by anyone between 18 and 39. A LISA can be a Cash or Stocks and Shares ISA. A 25% government bonus can be received on any contributions. However, there are penalties if a withdrawal is made before the age of 60 for any purpose other than buying a first home. The maximum amount that can be placed into a LISA each tax year is £4,000.
- Innovative Finance ISA: An Innovative Finance ISA is designed for peer-to-peer lending investments. Usually these kinds of investments are higher risk than traditional alternatives, so are not appropriate for most investors.
- Help to Buy ISA: While Help to Buy ISAs can no longer be opened, if there is one already open, contributions can still be made until November 2029. Up to £200 can be added per month and the government will top up savings by 25% (up to £3,000) when buying a first home.
3. Dividend allowance
2022/23 allowance: £2,000
Using a Dividend Allowance could be a tax-efficient way to boost income.
Dividends are paid by companies to share out the profits they have made. If shares are held in a dividend-paying company, payments can be received. The amount received will usually be dependent on performance and stock price.
Dividends can also be received if someone owns their own business. Many company directors draw a combination of salary and dividends from their business to maximise the tax efficiency of their income.
The Dividend Allowance means every individual can receive up to £2,000 in dividends without incurring tax. So, a company director, can pay themself up to £2,000 in dividends from the business without paying any Dividend Tax.
How much tax paid on dividends that exceed the allowance will depend on the Income Tax band:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
4. Capital gains tax annual exempt amount
2022/23 exempt amount: £12,300
Using a Capital Gains Tax annual exempt amount could save money when selling some assets.
Capital Gains Tax (CGT) is paid when certain assets are sold and make a profit. This may include stocks that aren’t held in an ISA, a second property, or personal possessions worth more than £6,000 (excluding cars).
For the 2022/23 tax year, the CGT exempt amount means an individual can normally make profits up to £12,300 before CGT is due.
In some cases, spreading out the disposal of assets across several tax years can help reduce CGT liability. Partners may also want to plan to maximise both of their annual exempt amounts.
If this allowance is exceeded, the rate of CGT will depend on other taxable income:
- Standard CGT rate: 18% on residential property, 10% on other assets.
- Higher CGT rate: 28% on residential property, 20% on other assets.
5. Pension annual allowance
2022/23 allowance: up to £40,000
A pension is a tax-efficient way to save for retirement. Using the Annual Allowance could help create financial security in later years.
The pension Annual Allowance is the maximum that can be paid into a pension each tax year while still benefitting from tax relief. This includes pension contributions made by an employer or other third parties.
In the 2022/23 tax year, the Annual Allowance is 100% of annual earnings, up to £40,000, for most people.
However, there are two reasons why an Annual Allowance may be lower:
- The Tapered Annual Allowance means if the threshold income is over £200,000 and adjusted income is more than £240,000, Annual Allowance will be reduced by £1 for every £2 that income exceeds these thresholds. It can be reduced by a maximum of £36,000. As a result, Annual Allowance can be as low as £4,000.
- A flexibly accessed pension may be subject to the Money Purchase Annual Allowance. This reduces the amount that can be tax-efficiently saved into a pension to £4,000 each tax year.
Unused pension Annual Allowance can be carried forward for up to three tax years. Unused Allowance dating back to 2019/20 can be used up until 5 April 2023.
6. Inheritance tax annual exemption
2022/23 exemption: £3,000
An estate could be liable for Inheritance Tax, the annual exemption means a gift can be passed on tax-free.
Gifting to family members early can reduce the value of an estate and so, the eventual Inheritance Tax (IHT) bill.
However, not all gifts are immediately exempt from IHT. Some may be considered part of an estate for up to seven years. Taking advantage of gifts that are outside of an estate immediately can provide peace of mind.
Each year, the IHT annual exemption means a tax-free amount can be passed on. In 2022/23, this amount is £3,000. The limit applies per individual, so couples can gift up to £6,000 between them.
The exemption can be carried forward for one year.
7. Gifts from income
2022/23 allowance: dependent on disposable income
Making gifts from income could reduce an estate’s Inheritance Tax bill.
Gifting from income is another way to reduce a potential IHT bill. However, these gifts need to be made regularly and must:
- Be made from income
- Be part of normal expenditure
- Leave sufficient income to maintain current lifestyle.
This can be a useful way to offer financial support to loved ones. For example, paying the school fees of grandchildren or making regular deposits to pay for the living costs of children.
To take advantage of this, it’s important to make sure regular gifts have continued throughout the current tax year. Records should be kept of gifts made under this exemption.
Gifts from income must be made regularly. So, missing a gift might mean that HMRC doesn’t deem the gifts “regular”, so includes them in the value of the estate when the person passes away.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Contact us
Keeping on top of allowances and exemptions can be challenging. We can help ensure the ones that make sense for you are part of your financial plan.
If you would like to discuss any of the above points in more detail please contact us. It’s part of service to you to help you put an effective plan in place for each tax year that considers changes and helps you make the most of your income and wealth.
Please note: This guide is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Production