Key tax breaks to maximise in 2023

The list of ways in which individuals will pay more tax is long, but one of the most prominent will be Income Tax on earnings. Income Tax bands for basic and higher rate were frozen in the most recent Autumn Statement by the Chancellor Jeremy Hunt. The policy of not increasing allowances in line with the cost of living, or fiscal drag as it is known, forces millions of earners to pay more tax as wages go up.

For higher earners, the threshold at which the additional rate of 45% kicks in is being reduced to £125,140 from the current £150,000 in April.¹

Tax hikes – which also include those on dividends received and for capital gains – come at a time when households are grappling with high inflation where the cost of goods and services, food and energy in particular, is soaring.

So, now is the perfect time to remind yourself of the tax breaks available and make sure you and your family are maximising those that are appropriate.

Consider your ISA allowance

You can shelter up to £20,000 in an ISA where it’s exempt from Income Tax and Capital Gains Tax. This allowance is renewed every April. But if you don’t use it, you lose it. By taking full advantage you could potentially grow a savings pot worth hundreds of thousands of pounds over time.

Shelter dividend-paying investments

Each of us can receive up to £2,000 in dividends income tax-free. After that you’ll pay 8.75% for basic rate, 33.75% for higher-rate and 39.35% for additional-rate taxpayers.

From April the tax-free allowance is falling to £1,000 and then to £500 in April 2024.

It’s possible to move any dividend-paying shares into an ISA to avoid future extra tax bills, however, you should take independent tax advice before doing so as there might be Capital Gains Tax implications.

If shares are moved into an ISA – quirkily named actioning a ‘bed and ISA’ – no Income Tax or Capital Gains Tax will be due on future returns.

Maximise pension perks

Paying into a pension is extremely tax efficient as you normally get tax relief on contributions. You’ll typically get 20% paid by HM Revenue & Customs and if you pay income tax at a higher or additional rate you can claim additional relief on your self-assessment tax return to bring the total relief to either 40% or 45%. There’s an annual limit of £40,000 for all unless you are a high earner or have already accessed a flexible pension income – though you can’t pay in more than you earn. Pensions offer the unique benefit of being able to backdate unused allowances up to three years.

Plus, money invested in your pension grows free of Capital Gains Tax and Income Tax, which will enable your savings to grow much faster.

If you’re already paying into a work scheme you could increase contributions or top up in a personal pension – perhaps a self-invested personal pension (SIPP).

If you’re self-employed, you’ll need to make your own pension arrangements. Paying into a pension will also save on your self-assessment tax bill as a higher rate (or top rate) taxpayer.

Consider higher risk investments

A Venture Capital Trust (VCT) is designed to raise money for start-up companies.

They are UK closed-end collective investment schemes. This means an investor owns shares in the VCT, rather than the underlying companies. An established VCT will typically hold over 30 companies within its portfolio – and the investor has exposure to all of them.

Investors can place up to £200,000 into these trusts each tax year and get 30% income tax relief, as long as you have paid enough income tax in the tax year of subscription and the VCT shares are held for five years.

Aside from the generous tax breaks – investors have the opportunity for high returns and diversification from more traditional asset classes. These investments also benefit the UK economy, since at the core, the purpose of VCTs is to get money into small British businesses, drive growth and create jobs.

VCTs are high risk investments and carry a significant risk of capital loss. Barclays Wealth Management conducts thorough and rigorous analysis of VCT investments available in the market in establishing its panel of preferred investments.

Find out more about VCTs  

Save for your children

Consider a Junior ISA for tax-free investing, where you can shelter £9,000 each tax year until they reach 18. There’s an investment ISA as well as a cash version.

For long term savings for children, you might decide to invest money on their behalf, rather than simply use a savings account, because stock markets generally tend to perform better than cash over the longer-term.

You could even start a pension for under-18s. Tax rules allow up to £3,600 to be saved in a pension, such as a Junior SIPP for under 18s each tax year. A Junior SIPP allowance comes in addition to a Junior ISA allowance.

Estate planning

The standard Inheritance Tax (IHT) allowance allows individuals to pass on £325,000 without any IHT being due – otherwise known as the Nil Rate Band (NRB). For those with children or direct descendants who can inherit the family home, this could increase by £175,000 per person following the introduction of the Residence Nil Rate Band (RNRB) in 2017.

That means that for a married couple or civil partners, the first £1 million of their estate could potentially be free of IHT. 

However, for estates over £2 million, this additional RNRB is reduced by £1 for every £2. So, for married couples or civil partners, should the total estate exceed £2.7 million, the additional RNRB is lost entirely.

The IHT nil-rate band has been frozen at £325,000 since 2009/10, which means that it has been reducing in real terms over time. It will be frozen at this level until 2028.²

The risk is that without proper financial planning, much of this wealth could be handed over to HM Revenue & Customs in the form of IHT, where estates are valued at more than the current threshold allowances.

Consider using tax allowances for passing on wealth to reduce the value of your estate, during your lifetime. This includes the annual exemption which allows you to give away up to £3,000 each tax year IHT free. You can also give £250 to any number of people every year, but you cannot combine it with your annual £3,000 exemption. You can give away all types of assets, as well as cash, including property and shares IHT free, as long as you live for seven years after making the gift.

Taking advice on all elements of tax planning can help ensure you don’t end up triggering unknown tax bills.

Find out more about estate planning

Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you are unsure about investing, you should speak to your Wealth Manager.

The value of investments can fall as well as rise. You may get back less than you originally invested.