End-of-tax-year checklist

Time is running out to make the most of valuable tax perks before the end of the 2022/23 tax year - and before several tax-free investment allowances are slashed on 6 April.

At midnight on 5 April 2023, the current tax year will finish and the new 2023/24 tax year will begin.

Several generous allowances will disappear overnight, so it makes sense to act quickly and claim any tax breaks you’re entitled to.

It’s even more important this year to take action, as the 2023/24 tax year will usher in a new, less favourable, tax regime for investors.

For example, from 6 April, the annual dividend allowance and capital gains tax (CGT) exemption will be cut. The dividend tax allowance will be halved from £2,000 to £1,000, while the CGT allowance will be slashed from £12,300 to £6,000.

High inflation and higher taxes mean it’s vital to grab all the tax breaks and take advantage of all the tax-free allowances on offer. According to the investment platform Interactive Investor, the average tax paid per person in the UK is £13,884. It’s forecast to hit £15,649 by 2027, the highest tax burden on record (even after being adjusted for inflation).

“The tax year end is looming but there is still time to protect your investments from the taxman’s impending wealth tax raid,” comments Laura Suter, head of personal finance at the investment platform AJ Bell.

“You can stuff money into your ISA and/or pension, move your assets to your spouse and maximise this year’s allowances before the deadline hits.”

Here’s our checklist to ensure you don’t miss out on any tax breaks or free cash before the next tax year starts.

1. Use your ISA allowance

Your £20,000 ISA limit is often referred to as “use it or lose it”. This means you can pay in a maximum of £20,000 across all your ISAs (bar the junior ISA, which has a separate £9,000 limit) each tax year, and you can’t roll over any unused allowances into the next tax year.

The £20,000 allowance applies to cash ISAs, stocks and shares ISAs, lifetime ISAs and innovative finance ISAs. 

Putting your money into an ISA means you won’t pay a penny in income tax, dividend tax or CGT on any interest, income or profits that you receive. So, it’s worth moving any investments into a stocks and shares ISA, and savings into a cash ISA to shelter it from the taxman.

If you want to open a stocks and shares ISA but aren’t sure where to invest the money, you can always “park” it in a cash fund and decide later.

2. Do a “bed and ISA”

You may not have had to worry about paying tax on investments held outside an ISA in the past, as the CGT and dividend tax-free allowances have more than covered any income or profits.

However, both of these allowances will shrink come 6 April, and you could be faced with an unexpected tax bill. 

Calculations by Interactive Investor show that an investor with a £50,000 portfolio yielding 4% (£2,000 a year in dividend income), will go from paying no dividend tax to £88 from 6 April 2023. A higher-rate taxpayer will face a tax bill of £338.

Shifting investments into an ISA via a process known as a bed and ISA transfer protects future gains and dividends from the clutches of tax.

It involves selling and buying back shares, which could trigger a capital gains tax liability – so it’s important to make use of the larger allowance available this year.

3. Transfer money to your spouse

Any investments transferred to your spouse or civil partner are exempt from capital gains tax - so as long as your spouse hasn’t used up their tax-free allowance this year and has some ISA allowance remaining, you can make the most of those tax breaks. 

Keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.

The same goes for income-producing investments: your spouse will also benefit from a £1,000 tax-free dividend allowance from 6 April, so you can move investments to them to maximise that tax break. 

There’s a possible double benefit, too. If your spouse is in a lower income tax bracket, they will pay either dividend or capital gains tax at a lower rate. 

And even if they have used up their allowances, there could still be a benefit to shifting the assets to them, allowing you to benefit from the different tax rules.

4. Get free cash with a Lifetime ISA

Making the most of a lifetime ISA can be one of the most efficient ways of maximising allowances and bonuses. They are available to those aged under 40, and by contributing up to £4,000 each tax year, you can receive a 25% bonus from the government - worth £1,000 per year.

This money can either be put towards a first home, as long as the property cost £450,000 or less, or for a pension that could be accessed when you turned 60. 

5. Claim the marriage allowance

The marriage allowance applies to couples where one partner does not pay income tax - or their income is below the £12,570 personal allowance - and the other partner pays basic-rate income tax. It could save you up to £252 a year in tax savings. 

More than 2.1 million couples currently benefit from the tax break, which allows husbands, wives and civil partners to transfer part of their tax-free personal allowance to their higher-earning partner.

HMRC estimate more than 2 million couples could be missing out on the savings.

The non-taxpayer must apply on the HMRC website to access the allowance.

6. Maximise your pensions

You can use your pension contributions to reduce your income tax band.

When you contribute to your SIPP, the gross value of the contribution has the effect of extending your basic rate tax band. This means that the rates of capital gains and dividend tax you pay could be lower if it means you are no longer a higher-rate taxpayer. 

If you’ve only just tipped over into the next tax band, a small pension contribution could bring you under the threshold, leading to a significant saving.

But remember that annual allowances on pension contributions apply across all the pension schemes to which you belong - that includes contributions made on your behalf by an employer.

The taxman has kept hold of £1.3 billion in unclaimed tax benefits over the past five years, so it could pay handsomely to see how you can benefit.

7. Reduce your inheritance tax liability

Several inheritance tax affordances can help you reduce your overall tax liability.

The most well-known is the  ‘annual exemption’, allowing you to make a £3,000 gift. Crucially, this allowance can be carried forward – so, you can make a £6,000 gift should you have the allowance remaining from last year.

As a couple, each person gets the same £3,000 allowance, potentially doubling the IHT reduction you can make.

You are allowed to make gifts of up to £250 to as many people as you like, so long as you haven’t made any larger gift to that person.

8. Help your kids with an ISA or pension

On top of your pension contribution allowances, money can be put aside into someone else’s savings, including your children. The benefit of this is children are still entitled to tax relief on the contribution, even if they are non-tax payers.

Investing £3,600 a year, the maximum allowed, on behalf of a child will cost you only £2,880. £720 from the taxman then tops up your contribution.

While starting a pension for a child may seem counterintuitive, it is a popular route for maximising tax savings. In 2019, 60,000 families have opened pension plans for kids, according to HMRC.

Likewise, an ISA can act in much the same way. Parents, relatives and friends can contribute a total of £9,000 into the account each tax year, and any investment gains are tax-free.

Like adult ISAs, there are two types of Junior ISA: cash ISAs, and stocks and shares ISAs. But special consideration needs to be made when selecting which Junior ISA is best suited to you.