YEAR-END TAX PLANNING

February 13, 2024

It’s not too late to undertake some end-of-year tax planning. If you have some spare cash, an obvious tax planning point would be to maximise your ISA allowances for the 2023/24 tax year (currently £20,000 each). You might also consider increasing your pension savings before April 5, 2024.

USE A LIFETIME ISA (LISA) TO SAVE FOR YOUR FIRST HOME

Those aged between 18 and 40 can set up a Lifetime ISA (Individual Savings Account) to buy their first home or save for later life. You can put in up to £4,000 annually until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Note that the Lifetime ISA limit of £4,000 counts towards your £20,000 annual ISA limit.

You can withdraw money from your ISA if you’re:

  • buying your first home,
  • aged 60 or over, or
  • terminally ill, with less than 12 months to live.

However, you’ll pay a withdrawal charge of 25% if you withdraw cash or assets for any other reason (an unauthorised withdrawal). This recovers the government bonus you received on your original savings.

PENSION PLANNING

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. 

Additional pension contributions can be even more effective if your income is between £100,000 and £125,140, as the gross pension contribution reduces net income for the purposes of the reduction in the personal allowance. Note that for every £2 of income over £100,000, the £12,570 personal allowance is reduced by £1, with a reduction to nil where net income is £125,140 or more. This is effectively a 60% tax saving.

CAPITAL GAINS TAX PLANNING

You might consider bringing forward capital gains before 6 April 2024, when you haven’t used your £6,000 CGT annual exemption. This exempt amount reduces to just £3,000 for gains made in 2024/25.

CAPITAL EXPENDITURE PLANNING

Unless the business year ends on 31 March or 5 April, the end of the tax year is not a significant date regarding capital allowances. For new equipment to attract capital allowances, the expenditure must be incurred on or before the end of the accounting period. Limited companies buying new (not second-hand) equipment are entitled to fully expense the cost of most acquisitions against business profits. There is no financial limit on expenditure qualifying for this “full expensing” relief. 

Unincorporated businesses are entitled to a 100% write-off for the first £1 million spent on new and used equipment in a 12-month period. This “annual investment allowance” (AIA) is also available to limited companies buying second-hand equipment. The AIA does not apply to motor cars, but there is a special 100% tax relief if you purchase a new zero-emission motor car.

Where equipment is bought under a hire purchase contract, the capital allowances outlined above are available on the total cost of the asset, provided it has been brought into use by the end of the accounting period. This is even though the payments may be spread over several months.

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