Financial planning opportunities for tax year end 2022/23

There are less than three months left of the 2022/23 tax year. This may seem ample time to ensure your clients take advantage of the current year’s allowances and exemptions, but many have needs more complex than purely shovelling spare cash into an individual savings account (ISA). 

Reforms to the tax system unveiled within Jeremy Hunt’s Autumn Statement means acting between now and April has become more important. The chancellor slashed the annual exemptions of both capital gains tax and dividend tax, making them less generous in years to come. And many of your clients have long relied on these to keep their tax bills low. 

So, what do taxpayers need to think about between now and April 5? 

1. Capital gains tax   

Using this year’s CGT allowance is something those with investments held outside of tax wrappers must consider. This is because the current allowance of £12,300 is due to halve to £6,000 from 6 April, then halve again to £3,000 from 2024. 

A common approach here is Bed and ISA, where shares up to the CGT allowance are sold in, for example, a general investment account, and repurchased in an ISA to protect future gains and income from CGT and dividend tax. For those yet to retire, Bed and SIPP might be a more appropriate course of action. 

However, some of your clients may be able make encashments greater than £12,300 without paying tax. As investment markets have struggled in the past year or so, anyone who invested recently may have less than what they initially put in. This means they could potentially withdraw as much as they like and not face a CGT bill. 

They can also consider offsetting losses against gains to reduce or eliminate any CGT liability from other disposals, and married couples can transfer investments to each other without triggering a tax charge. 

In summary, the government’s decision to lower the annual CGT exemption will inevitably result in the tax catching more people; that’s the aim after all. But with some careful planning your clients will pay less than they need to. 

2. Dividend tax 

Just like the CGT allowance, the dividend allowance is also being slashed over the next two tax years. Currently your clients can receive £2,000 a year in dividends without paying tax, but this figure is dropping to £1,000 and £500 from April 23 and April 24, respectively. 

Again, this strengthens the appeal of tax wrappers, but for clients with sizeable GIAs a new investment strategy might be prudent from April 6 onwards. In any case, the change means annual investment reviews have become even more important, and financial advice more valuable. 

3. Pensions 

Making sure that your clients are maximising their pension contributions is a cornerstone of good financial planning - the benefits are especially valuable for workers in the 40 per cent and 45 per cent income tax brackets. 

The current annual allowance of £40,000 (or 100 per cent of earnings if lower) will remain for the foreseeable future, offering your clients plenty of scope to save tax efficiently for their retirements. 

However, as advisers know all too well, not every client’s situation is as simple as this. There’s often a lot more to consider. Things can get complicated. 

For high earners, the tapered annual allowance may reduce what your clients can pay in. To cover the breadth and depth of the tapered annual allowance rule would require an article in itself. But as a brief refresher, for every £2 a client’s adjusted income exceeds £240,000, their annual allowance reduces by £1 to a minimum of £4,000.  

It’s also worth remembering the carry forward rules, which enable many people to contribute more than the annual allowance, providing they have sufficient income. 

Restrictions may also apply to anyone already drawing an income from their pensions in the form of the money purchase annual allowance (MPAA), which if triggered, reduces the annual allowance to £4,000. 

However, this typically doesn’t apply to clients who have taken the tax-free cash, but are yet to switch on income drawdown, or who have purchased a lifetime annuity with the remaining pot. 

For clients who have already accumulated a sizeable pension pot, the biggest hurdle to further funding could be the lifetime allowance (LTA), which is currently £1,073,100 – and will be frozen at this figure until 2028.  

With the LTA barely budging since 2016, more and more of your clients are breaching its limit. 

In the 2020/21, a total of £382million in LTA charges was paid by 8,610 individuals; an 11 per cent uptick on the previous year. And we can expect this figure to continue rising sharply year on year. 

Advisers clearly have an instrumental role to play in helping clients ensure their pension savings end up in the most appropriate home. In some situations, there’s merit in further pension funding even though the LTA has been exceeded. One of these is to receive matched employer contributions, the benefits of which (it's free money, after all) typically outweigh the 25 per cent LTA charge. 

Meanwhile, those whose savings exceeded £1million on 5 April 2016 can apply for either enhanced or fixed protection, which could raise the LTA to £1.25million. 

For owners/directors of small-and-medium-sized businesses wishing to make pension payments from the company the situation is slightly different. While contributions are typically restricted to £40,000 a year, the 100 per cent of earnings rule doesn’t apply - good news for firms facing a hefty corporation tax bill. It’s worth bearing in mind that company pension payments will become even more attractive from 6 April when the top rate of corporation tax rises to 25 per cent.  

Pension contributions can have further rewards for those hit with the High Income Child Benefit Charge or have a lost or reduced personal income tax allowance due to income exceeding £100k. In both cases, the effective rate of tax relief from making pension payments can be as much as 60 per cent. 

4. Enterprise investment schemes (EIS) and venture capital trusts (VCT) 

For investors looking for something a bit racier, EIS and VCTs can offer lucrative returns and significant tax perks. But, as always, with higher potential returns comes greater risk, and in some cases steep charges. 

However, for clients who are comfortable with taking sizeable risk with a portion of their portfolio, EIS and VCT are an option. And they’re proving increasingly popular with investors. The VCT sector raised £1.13 billion in the 2021/22 tax year - a record, and a 65 per cent increase on the previous year. 

The big attraction here tax relief, which is catching the eye of investors whose annual pension contributions are restricted by the AA, taper, LTA or MPAA. EIS and VCT investors receive 30 per cent income tax relief upfront, with no tax payable on both capital growth and dividends, which will become more attractive in future years due to the respective allowances reducing. 

As always, the key here is to ensure that any investment aligns with your client’s personal risk profile. But for those comfortable with exposing some of their capital to significant risk, EISs and VCTs can prove useful additions to a diversified portfolio.