Year End Tax Review 2022/23

Review your mix of income

All interest you receive is taxable, unless it is from an ISA, but banks and building societies don’t deduct tax from interest paid to individuals. For most taxpayers the rate of tax payable on that interest is 0%, so no tax is in fact due.

This nil tax rate applies where your savings income falls within your Savings Rate Band (SRB), which is worth up to £5,000, or within your personal savings allowance (PSA), which is worth £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. Any savings income that falls outside the SRB or PSA is taxed at your marginal income tax rate (20%, 40% or 45%).

The available SRB depends on how much taxable income you receive, other than interest and dividends. Examples include salary, pensions, trading profits or rent. If you can control the type of income you receive, you can reduce the total tax you pay for the year, just like Harry in the example below.

Tax breaks on savings

You can save for retirement in a number of ways. The traditional route is via a pension scheme, but you could also use an ISA.

Savers aged under 40 can open a Lifetime ISA (LISA) and contribute up to £4,000 per year, which attracts a 25% bonus from the Government. This bonus is withdrawn if the savings are accessed other than for use as a deposit for the saver’s first home, on diagnosis of a terminal illness, or from age 60 onwards.

The Lifetime ISA savings are counted as part of the annual ISA allowance of £20,000 per tax year. This allowance can’t be carried over to a future tax year, so you need to use it or lose it.

ISA savings are not taxed when they are withdrawn, but they don’t attract tax relief on the way into the account.

Pension scheme savings are taxed when they are withdrawn, with an exception for the first 25% cash lump sum taken. However, contributions into a registered pension fund will attract tax relief at your highest tax rate, subject to the cap imposed by your annual allowance.

This annual allowance is normally set at £40,000, which covers pension contributions made by you and by your employer on your behalf. Any annual allowance not used can be carried forward for up to three years.

If your income is over £200,000 and adding the pension contributions made by your employer takes that total to over £240,000, your annual allowance is reduced by £1 for every £2 over the latter threshold, down to a minimum of £4,000.

Scottish Taxes

The Scottish Government has the power to vary the Income Tax rates for people who live in Scotland, but not in respect of income from savings or dividends, which are taxed at rates applicable to the rest of the UK (as are capital gains).

If you are resident in Scotland in 2022/23, you may pay Income Tax at up to five different rates: 19%, 20%, 21%, 41%, and 46%. The latter two rates are due to increase on 6 April 2023 to 42% and 47% respectively.

These Scottish tax bands are not aligned with the NICs thresholds, which leads to some very high marginal rates for Scottish residents, as shown in the table.

The NICs rates are different for self employed individuals and don’t apply for those over state pension age. The high marginal rate between £100,001 and £125,140 arises because the Personal Allowance is withdrawn by £1 for every £2 of additional income in that band. The threshold for the highest rate is also reducing to £125,140 on 6 April 2023.

Will you get a full state pension?

If you are looking forward to retirement, it’s a good idea to check out how much state pension you will get. You can do this by logging on to your personal tax account on gov.uk, which contains lots of useful information about how much tax you owe and about your National Insurance Contributions (NICs) record, among other things.

To receive the full amount of the state pension, your NICs record needs to contain 35 completed years. You need at least ten complete NICs years to receive any amount of the UK state retirement pension.

You can plug gaps in your NICs record by paying voluntary Class 3 NICs. This payment generally needs to be made within six years of the gap year. Self-employed traders who don’t have to pay Class 2 NICs because their profits are below £6,725 can choose to pay Class 2 voluntarily instead of Class 3; paying Class 2 NICs will be cheaper. For 2022/23, where profits are between £6,725 and £11,908, no Class 2 NICs are payable, but the trader still gets a NICs credit.

You may also qualify for NICs credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NICs credits were not always applied automatically, so it’s worth checking your own NICs record in your personal tax account.

If you have already paid enough NICs to get the full state pension, you may consider taking any further funds from your company as dividends, rent, or as contributions to a private pension.

Don’t miss tax deadlines

If you miss the deadline for filing your self-assessment tax return (31 January for online filing) you will be charged a £100 penalty.

If the return is filed more than three months late, an additional £10 per day is charged and, after six months, another penalty is incurred (the higher of £300 or 5% of the tax due). The flat-rate penalties will stand even if the tax return shows no tax.

Your company’s corporation tax return is due a year after the end of the accounting period. The penalty for being even one day late is £100 and another £100 is imposed after three months, then 10% of the tax due if the return is six months late. If you make a habit of submitting late company returns, the fixed penalties rise to £500 each time. If you have a ‘reasonable excuse’, HMRC may agree to cancel the penalty. However, what you think is a reasonable excuse may well be found not to be so by HMRC or a tax tribunal.

Tax compliance is very important: don’t take it lightly!

Crossing the threshold

When your total income reaches certain levels, it tips any extra income into a higher tax band. This can also mean you lose part or all of your personal savings allowance (PSA), personal allowance (PA) or pensions annual allowance.

Taxpayers who live in Scotland have slightly different tax thresholds but the principle is the same.

Although the rates of income tax on earnings and dividends are not changing on 6 April 2023 and most tax thresholds are frozen, you may be able to save tax by moving income from 2022/23 to 2023/24. You could also save by making certain payments in 2022/23 rather than in 2023/24.

Say you are a 20% taxpayer in 2022/23 but expect that a lump sum termination payment due in March 2023 will tip you into the 40% band (over £50,270). If you ask your employer to delay paying the termination payment until after 5 April 2023, you’ll pay the tax on that income later. You will also retain all of your 2022/23 £1,000 PSA and may still stay out of the 40% band for 2023/24. The main thresholds for 2022/23 are:

• PA: £12,570 – basic rate tax (20%) starts
• Higher rate threshold: £50,270 – 20% rate increases to 40% and PSA reduces from £1,000 to £500
• Married couples: transfer of £1,260 of PA is possible where the higher earner has income up to £50,270
• Child Benefit clawback: income between £50,000 and £60,000
• Withdrawal of PA: income between £100,000 and £125,140
• Additional rate threshold: £150,000 (£125,140 for 2023/24) – 40% rate increases to 45%, PSA removed
• Pension annual allowance reduced where income (including employer pension inputs) above £240,000

Income that can easily be moved from year to year includes:

• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’.

A family view

In the UK, everyone is taxed as an individual, but social security benefits, including tax credits and Universal Credit, are awarded on the basis of the family’s total income. Child Benefit is clawed back based on the income of the higher earner in a couple, irrespective of who receives it.

Families with an unequal distribution of income will often pay more tax than couples who each earn just enough to cover their personal allowance (PA) and the basic rate band. The thresholds for restricting Child Benefit (£50,000), PA (£100,000) and pension annual allowance (£240,000) all operate for the individual, so disadvantage families where the income is concentrated in one person’s hands.

Consider the Browns – they have two children and claim Child Benefit. In 2022/23 George Brown earns £90,000 and pays higher rate tax, but Sally Brown has no income. As George’s income is over £60,000, the family’s total Child Benefit is clawed back from him as a tax charge.

In contrast, John and Joy Green each earn £45,000, so they keep their Child Benefit and pay less Income Tax, as their highest marginal tax rate is 20%. Both Greens make use of their full PA and most of their basic rate band.

Roger and Rose White are in a worse tax position. Rose’s total income is £210,000 and her employer contributes £40,000 into her pension scheme every year. Roger and Rose have no effective PA, as Roger has no income to set his allowance against and Rose’s PA is entirely withdrawn, because her income exceeds £125,140.

Rose is treated as having income of £250,000 (£210,000 + 40,000) for pension relief purposes. Her pension annual allowance is therefore reduced to £35,000, so she suffers an annual allowance charge at 45% on £5,000 of the pension contribution made by her employer.

These examples show that families can save tax if they transfer some income from the higher earner to the lower earner, in order to take advantage of the PA or lower tax bands and to avoid the reduction of PA or the clawback of Child Benefit. This is not always easy to do, but the following methods are permissible:

• make an outright gift of investments that produce taxable income
• put savings and investments into joint names and share the income
• employ the spouse or partner in the other person’s business
• take the spouse or partner into partnership in that business

HMRC can challenge some of these methods if they think the transfer is not genuine – always take tax advice to be sure that your plan will work.

Reducing CGT bills

Everyone has a CGT annual exemption of £12,300 for 2022/23. This is wasted if you don’t make capital gains in the tax year, as it can’t be carried forward. In 2023/24 the annual exemption will be £6,000 and in 2024/25 it will be cut to £3,000.

If you are planning to dispose of assets that will create capital gains, you can save tax if the disposals are spread over several tax years, but you need to consider the reducing amounts of the annual exemption that will be available.

If the asset must be sold in one go, you could reinvest part or all of the gain in Enterprise Investment Scheme (EIS) shares, but you must be prepared to take a risk. This will defer the gain until the EIS shares are sold. You can sell sufficient EIS shares in later years, so the that the gains chargeable are covered by your annual exemptions.

Gifts to your spouse or civil partner don’t create immediate taxable gains, as the recipient takes over the transferor’s CGT cost. You can use this transfer between spouses to share the ownership of a property, and hence the gain, and thus use two annual exemptions in one tax year on eventual disposal of the asset.

When you give a valuable asset to any other close relative, the disposal is treated like a sale at market value and the deemed gain is taxable. However, where certain assets (e.g. family trading company shares or agricultural property) are given to other family members, a capital gain may be avoided if an appropriate ‘gift relief’ claim is jointly made. This will lead to the recipient having a bigger capital gain on eventual disposal of the asset than would otherwise have been the case.

You should always take specific legal advice when giving away land or buildings, or a share in such property. Stamp Duty Land Tax (or equivalent land taxes in Scotland or Wales) may be payable if the property is mortgaged.

Electric vehicles are still tax-efficient

The taxable benefit for using an electric company car for private journeys is currently calculated at 2% of its list price. If you chose a hybrid company car, models that can drive at least 130 miles on electric power also currently carry a taxable benefit of just 2% of list price.

However, these benefit levels will rise by one percentage point each year from April 2025 until they reach 5% of list price in 2027/28.

Even at this level an electric or hybrid company car is a bargain, as the company will cover the capital cost of the vehicle, the insurance and any repairs or servicing. Electric cars currently pay zero road tax (VED), but this will change from April 2025.

Driving an electric van can be beneficial, as there is currently zero taxable benefit for the driver! It has not yet been announced if this will remain the case from 2023/24.

Where a business buys a new electric car or van, it can claim 100% of the cost as a capital allowance in the year of purchase. For an electric car to qualify for this 100% First Year Allowance it must be acquired brand new (not second-hand) before 1 April 2025.

Companies that acquire brand new vans can claim a super-deduction of 130% of the price, if the van is acquired before 1 April 2023 (although the 30% increment will be reduced where the accounting period straddles 1 April 2023).

Where the business installs electric vehicle charging points before 31 March 2025, it can claim 100% of the cost in the year of purchase.

Where employees are permitted to freely charge up electric vehicles at work, there is no taxable benefit for the use of that electricity. Drivers of electric company cars who pay for their own charging can claim a tax-free allowance from their employer of 8p per business mile driven from 1 December 2022.

Drivers who use their own electric cars for business journeys can claim the normal mileage rates of 45p per mile for the first 10,000 miles and 25p for any additional business miles driven in the tax year.

We can advise you on the personal and business tax issues associated with all vehicles, whether electric or not.

R&D tax breaks

Companies that invent new production methods or products can claim enhanced tax relief for the Research and Development (R&D) costs. The enhanced expenditure scheme for small and medium-sized enterprises (SMEs) increases qualifying expenditure by 130%, so that for every £100 spent, the company enjoys a deduction of £230 from taxable profits.

This may create or increase a tax loss. Where there are no other profits against which a loss generated by R&D expenditure can be set, the loss may be surrendered to HMRC, in exchange for a payable tax credit at 14.5%.

This scheme is particularly useful to start-up companies and those struggling to make profits in their early years. However, it is being amended so that, for expenditure on or after 1 April 2023, the additional deduction will decrease from 130% to 86% and the payable credit rate will decrease from 14.5% to 10%.

It will remain a very attractive tax relief, despite the claims process and conditions being tightened for accounting periods beginning on and after 1 April 2023 as follows:

• The company will need to inform HMRC of its intention to make an R&D claim within six months of the end of the accounting period to which the claim will relate.
• The claim must include details of the advances that the company is seeking to achieve and what uncertainties have been overcome in the R&D project.
• Costs of overseas workers or subcontractors based outside the UK must be excluded from the claim, with limited exceptions
• A senior officer of the company must endorse the claim
• Any agent that advised the company on the R&D claim must also be named within the claim

You can ask HMRC for an advance assurance that your company, and its R&D projects, will meet the requirements. We can help you do this.

The main benefit of advance assurance is that HMRC won’t raise further questions about your initial R&D claim or for R&D claims submitted in respect of the next two accounting periods.

You need to apply for the R&D tax relief within two years from the end of the accounting period in which the R&D costs were incurred. So, if your company has been innovative in the recent past, don’t delay your application for R&D tax relief! We can help you with this.

Squeeze value out of your losses

If your unincorporated business made a loss during the COVID pandemic in 2020/21 or in 2021/22, you will want to set off those losses against profits and receive a tax refund as soon as possible. Fortunately, the rules for pandemic losses allow you to do this.

A trading loss from 2020/21 or 2021/22 can be carried back to set against the profits of the same trade for up to three years. Losses from letting property don’t qualify for carry back, as they are treated as investment losses rather than from a trade.

When calculating the trading loss from the pandemic periods, you must include as business income any covid-related grants received, such as SEISS, furlough or business support grants. The SEISS grants are treated as business income of the tax year in which they are received, irrespective of the accounting period of the business.

Trading losses arising in 2021/22 will be set off in the following order:

1. Total income of 2021/22 and/or 2020/21
2. Trading profits of 2019/20
3. Trading profits of 2018/19

For steps 2 and 3 the maximum amount of loss that can be set off against profits in those two years together is £2 million. There is no cap on the amount of loss that can be set off in step 1.

For a 2020/21 loss, the same principles apply but the years of set-off are all one year earlier.

Any losses not used by this extended carry-back are carried forward to set against profits of the same trade in future years.

We can help you make a claim to utilise your losses in the most efficient way.