Sign up envelope

Sign up

X

Sign up for news alerts.

We update our financial wellbeing resources regularly to help people build their financial literacy. If you would like to be notified of these updates please submit your email address below, you can opt out whenever it suits you.

Square icon-style image overlaid on the hero banner

How to pay less tax: utilise your 2022/23 tax allowances

Are you ready for the end of the 2022/23 tax year? The deadline for making the most out of your tax allowances is April 5th, 2023, only a few weeks away. With many cuts set to arrive in the 2023 year, maximising your allowances is more important than ever. This article will help you understand what exemptions you may be eligible for, so you can make the best decisions for your money before it's too late.

Need support with your tax allowances?

Making the most of your 2022 tax allowances

The end of the 2022/23 tax year is fast approaching, with only a few weeks to go until the start of the 2023/24 tax year on April 6th. A lot of people don’t realise what opportunity this presents though as there is still time to utilise your tax allowances for this year and make sure you’re not missing out on any potential reliefs before they are reset. More than ever, it is important to plan for your personal tax and review what you are entitled to. In the 2023 tax year, many allowances and exemptions are set to change in line with Chancellor Jeremy Hunt’s autumn statement. Any allowances not used by April will be lost, so ensuring you are on top of your filings is essential.

What tax allowances are available to increase your tax-free income?

When thinking about your 2022/23 tax allowances, it can be difficult to know what you are entitled to. To make things easier to understand we have broken down six crucial allowances for you to consider, all of which will help you increase your tax-free income.

1. Personal Allowance

Before thinking about what additional allowances you may be eligible for, make sure you know exactly how much of your income is taxable above your Personal Allowance. This will determine how much Income Tax you pay, and may have an effect on any other exemptions you can claim, depending on which bracket you fall into. For most people, the 2022 Personal Allowance is £12,570 and this is frozen at the same amount in the coming tax year.

However, this can be increased if you claim Marriage Allowance. This enables married couples to transfer £1,260 of their personal allowance to one another and may help reduce their overall income tax if one spouse earns under the taxable amount. There is also blind person’s allowance, which allows someone to earn more before paying income tax.

Your personal allowance will decrease by £1 for every £2 of your adjusted net income over £100,000, meaning earners above this will pay tax on a greater proportion of their income.

2. Individual Savings Accounts (ISAs)

The ISAs annual allowance will remain the same in 2023 as 2022, however, with April 6th acting as a reset date for all tax allowances, it is worth considering whether you have made the most out of your 2022 ISA allowance. Each tax year, you can invest up to £20,000 in an ISA, or share £20,000 across different types of ISAs. If you don’t utilise this allowance you won’t benefit from this tax efficient way of saving as any returns from an ISA are tax free. People with surplus cash may have this in a current account or a collective investment account. By transferring some of this cash over to an ISA to utilise your allowance is invaluable, especially if your money is in a bank account being eaten away by inflation.

Lifetime ISAs are available for anybody between 18 and 40 to open and invest up to £4,000 into each year. The benefit of doing so means investors will receive at 25% bonus from the government, up to £1,000 a year.

Not many parents know that you can take advantage of the Junior ISA allowance as a way to save for children under the age of eighteen. You can invest up to £9,000 per year to count towards their annual allowance. The money you pay into a JISA doesn’t affect an adults ISA allowance. This can set up your kids for life as they struggle to save for tuition fees or their first home. It is worth bearing in mind this facility also if you receive inheritance and want to gift some of that to your children.

Thinking about how you are saving money not only helps you reduce the amount of tax you are paying this year but can help set you up for future financial gain protecting your interest down the line.

3. Pension Allowance

When it comes to your finances, it’s never too soon to plan for retirement and prepare your savings for the future. One of the traditional and most tax-efficient ways of saving for the future is by contributing to your pension because this type of investment is free from income tax and capital gains tax. There are income tax implications when you start to withdraw from a pension and you can read more about this in our Guide to Retirement Planning.

As well as helping to set you up for later in life there are some more immediate benefits to making contributions to your pension before the end of the tax year. This is especially important for business owners who may have surplus cash in their business and want to use pensions as a tax-efficient way to remunerate themselves.

Pensions are likely to be one of the most tax-efficient ways of saving because you receive tax relief of 20% on your contributions. The pension allowance is the total amount of money that you, your employer or any other third-party can put into your pension in a tax year. The pension allowance is £40,000 or up to 100% of your annual income, whichever is lower. For higher rate taxpayers, up to 20% on top of the basic rate of 20% tax relief can be claimed. This rises to 25% for additional rate payers. Pension allowance isn’t set to change in the coming year.

 

A tip from our Alex

A good tip from Alex Caswell, a Chartered Financial Planner in our London financial adviser office:

“A lot of people don’t realise that when it comes to pensions you can actually carry forward your unused allowances from the past three years. This provides people and business owners a great facility to save in a very tax efficient way. Of course it means you can’t touch that money until retirement, which depending on your situation could be a positive or negative thing. On a positive note you aren’t going to worry about the temptation of dipping into your savings so your money will stay invested for a long time which will have a great impact on its ability to grow. However, it is important clients understand their life objectives and don’t require that money for medium-term goals and that they have enough money saved away for emergencies and other events that life always throws at us. It really is about sitting down and discussing the timeline of things and making the most of the tax allowances that suit your unique situation.”

4. Dividend allowance for shareholders

The annual dividend allowance allows you to draw £2,000 of dividends before income tax is applied, regardless of any other income. This means that anybody receiving dividends from a company can draw up to £2,000 before any tax is paid. In 2023 this is set to halve to £1,000 per year. For many small business owners, this will mean an increase in income tax in the coming year and a reduction in take-home income. If you run your own business, you should consider ensuring you’ve made use of your dividend allowance before the 2023 financial year begins to maximise your tax-free income. Then when it moves to £1,000 there is even more of a reason you should be utilising your other allowance options.

In 2022/23, the rate at which dividends were taxed increased from the year previous. This year, basic-rate tax-payers will pay 8.75%, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%. Whilst these rates are set to remain in 2023, business shareholders may have already been affected by changes to how their dividends are taxed, and when coupled with the reduction in dividends allowance are set to further feel the pinch. If you own a business, it is also worth looking into additional ways to save on tax.

5. Gifting Allowance & inheritance

It is never pleasant to talk about managing your money after death, but for many people, thinking about how Inheritance Tax may impact their loved ones when they are gone is a reality of life. It is better for our mental wellbeing to plan for this in advance than have it as a worry in the back of our minds. By understanding more about gifting allowances you can ensure you protect those assets you intend to pass on.

An individual can make gifts of up to £3,000 over the course of a tax year, exempt from any inheritance tax even if you were to pass away. Money, property, jewellery or other goods, and stocks and shares will all count towards your gift allowance.

It is important to remember that your gift allowance will also include any losses made on sales. For example, if you were to sell your home to your child for less than what it is worth, the difference in value will be counted as a gift and may eat up some of your allowance.

Larger gifts can be made if you are to pass away within seven years of making the gift but the receiver will be liable to pay inheritance tax. Staying on top of your gifting allowances can help mitigate the cost for your relatives should the worst happen.

6. Capital Gains Tax Allowance

Capital Gains Tax, or CGT, is payable on any profit made after “disposing” of an asset. What is an asset? This usually refers to having sold something you own but can also refer to gifts and swaps, or any compensation for loss or damage. There are big changes coming to the Capital Gains Tax allowance, which determines the amount of profit you can earn before tax needs to be paid. Currently, the allowance is £12,300 for individuals but this will be dropping to £6,000 in 2023, before another reduction in 2024 to £3,000.

You may not be thinking about gifting or selling your assets, but if it has been on your mind, it may be beneficial to act swiftly before your allowance is decreased over the next two years. In addition to the tax advantages, it may have an impact on inheritance tax further down the line.

 

What Are The Benefits of Utilising Tax Allowances?

When it comes to your tax, it can be difficult to know exactly how to best benefit and keep more of your money under your control and if the effort is worth the potential savings. Reducing your tax bill will provide a short-term increase to your income. Making use of tax-free gifts and ISA contributions means you can safeguard for the future, whether that be for yourself later down the road or for your nearest and dearest as part of a financial legacy.

It is also worth knowing where best to keep and save your money as this will help you make the best decisions in increasing your tax-free income. For example, keeping your savings in the bank could be detrimental to your finances, with inflation eroding any cash in your account over time. By spreading your savings out using ISAs and your gift allowances, you make the most of your tax allowances now which will help prepare you for years to come. Plus utilising things like tax allowances is a good part of an overall financial strategy and you will create good habits around your money going into 2023/24.

Getting started with investments in the new tax year

You may want to consider investing your money in 2023. There are a lot of misconceptions about investing, like you need a lot of extra cash to start making investments. This isn’t the case and some of our clients have regular contributions of around £50 to £100 a month, others put lump sum annual payments into their investments perhaps when they receive bonus and some clients put ad hoc savings away as and when they have built some cash up. Other worries people have about investing are around whether their money is going to be safe. Whilst there will always be an element of risk it doesn’t have to be “dangerous” for your savings. When successfully planned investment planning is highly rewarding, especially when you can see it fluctuating in the markets and having linear growth over time.

If you’re unsure where to start, are new to investing or perhaps you are unsure about the existing investments you have in place, Unividual can help. Our family-run business provides support for those planning their investments, with honest advice tailored to your unique lifestyle and specific to your situation, which ensures you only invest what you can afford.

There’s still some time to invest into this side of the tax year and utilise your 2022/23 tax allowances but it is swiftly running out. Managing your tax can be daunting at the best of times but our experts are here to provide you with all you need. For more information, get in touch.

 

Author: Alex Caswell, Chartered Financial Planner in London

Editor: Cherie-Anne Baxter

Date: 17/02/2023

Updated: 17/02/2023

Approver: Quilter Financial Limited 27/02/2023

Risk Warnings:

The content and details of this article are as accurate as the day it was written or updated.

The value of investments and the income they produce can fall as well as rise, you may get back less than you invested.

Tax treatment varies according to individual circumstance and is subject to change.

For ISA’s Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager . Tax treatment varies according to individual circumstances and is subject to change.

You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.

By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
(i) you may lose the benefit of contributions from your employer (if any) to that scheme; and
(ii) your current and future entitlement to means tested benefits (if any) may be affected.

Reach out to Alex for financial advice, when you are ready

    Get in touch

    Close
    Next

    The information collected will be used solely for the purposes of providing background information when contacting you to arrange an appointment.