Are you ready for the end of the tax year?

There is a silver lining for those who have been at the short end of market volatility in recent months. As the end of the tax year looms it’s worth thinking about how you might be able to offset any losses against gains to reduce your overall tax burden. 

Before you think about offsetting losses, remember you have an annual capital gains tax (CGT) allowance of £12,300. “It will be a surprise how little is required in an investment account outside individual savings accounts (Isas) and pensions to be caught out by CGT. An investment account with just £61,500 that returns 20 per cent could make returns equal to the CGT exemption of £12,300,” says Shaun Moore, tax and financial planning expert at Quilter. Moore says it is important not to let unrealised CGT positions grow where possible: “By realising gains and making use of your allowance you are not allowing the problem to be kicked down the road,” he says.   

Capital losses can also be offset against capital gains in the same tax year, but cannot be carried back against gains of earlier years. But if you have an unused capital loss, it can be carried forward indefinitely against gains of future years, provided you have reported the loss to 'HM Revenue & Customs within four years after the end of the tax year in which you disposed of the asset. Moore notes that more and more people are getting caught by CGT, with over £45bn of this tax paid over the past five years, according to Statista data, compared with £25bn in the previous five years. 

However, note that if you sell and repurchase, you need to repurchase a different investment – but it could be something similar, for example, a fund or stock in the same sector as the one you sold. If you want to repurchase the same asset, you have to wait at least 30 days (unless you rebuy it within a tax wrapper). Svenja Keller, financial coach and founder of SK Inspire, notes that you could repurchase in a spouse’s name, which is known as a ‘bed and spouse’. 

For many people, using up additional allowances is tricky in the face of soaring energy prices and general inflation. However, if you are accessing your pension to supplement your income, Keller suggests trying to manage your marginal tax rates across different tax years.

“For example, if you are close to the 40 per cent income tax bracket, you could draw some taxable pension income out this tax year and some in the next tax year, to manage the amount of additional taxable income taken in each tax year,” she says. “This takes careful planning and depends on the tax situation in the current and the future tax year.”

Investors are also about to be hit with higher dividend tax rates, which rise by 1.25 percentage points on 6 April. The new rates are 8.75 per cent for basic-rate dividend taxpayers, 33.75 per cent for those on the higher rate and 39.35 per cent for additional rate taxpayers. Frozen allowances will also have a significant impact in these inflationary times, so it’s helpful to be aware of all available allowance to minimise the impact.

Bed & Isa

You can also do a so-called ‘bed and Isa’, a pair of deals where an investment is sold in a dealing account and bought in an Isa. The two transactions are carried out together so there is less exposure to market movements. This is useful if you want to reap the tax benefits of your Isa and don’t have readily available cash to invest, but do have investments outside tax wrappers. If possible, on 6 April, Keller suggests considering moving all available taxable investments straight into an Isa. This ensures that the Isa allowance is used immediately and less money is in taxable accounts. 

Some platforms, including AJ Bell Youinvest and interactive investor, offer a service which treats the two transactions a bed and Isa involves as just one deal so that you are only charged one dealing fee. However, if you buy individual shares or an investment trust, you still have to pay 0.5 per cent stamp duty as this is the one tax you have to pay when dealing in Isas.  

“While bed and Isa has more of a ring to it, it is important not to forget about bed and pension too,” says Moore. The same process applies but you transfer the money into a pension and reap the tax relief available. “Make sure you know your allowances as this will dictate how much you can switch into the tax efficient wrappers,” Moore cautions.

If you have a flexible Isa, it is worth tracking any withdrawals you have made over the year and making sure that you have restored your full allowance if you have spare cash. If you deal a lot you can even make sure that dealing fees are paid back in. 

Topping up pension contributions

It’s worth ensuring that you have paid as much into your pension as possible if you are still in the pension accumulation stage. The annual allowance is £40,000 or the value of your relevant earnings, whichever is lower, for most people. But this allowance tapers down by £1 for every £2 your income goes over £240,000, with the minimum reduced annual allowance currently £4,000 for anyone with an income of £312,000 or higher.

Remember that you can also carry forward three years of unused relief, and at a minimum it is worth paying as much into your pension as possible while your employer is still making contributions. Keller says that “pensions – for higher and additional rate taxpayers – are still one of the most tax efficient vehicles available.”

Managing inheritance tax

You might also want to think about using the £3,000 annual allowance for inheritance tax exempt gifts, which rises to £6,000 if it hasn’t been used in the previous year.

And you might consider topping up children or grandchildren’s Junior individual savings accounts, with the allowance of up to £9,000 for this tax year. Those aged 16-17 can also save up to £20,000 in a cash Isa. If you don’t want your child to have access to the money at 18, you could pay into a Junior Sipp, which currently has an annual limit of £3,600 including tax relief. 

Charitable giving

If you are subject to the high income child benefit tax (individual income over £50,000),  Kay Ingram, chartered financial planner, says to consider making charitable donations and/or extra pension savings to reduce income which counts towards the £50,000 threshold.

Similarly those near the £100,000 earnings threshold where the personal income tax allowance is reduced on a £1 for £2 basis can restore the first £12,570 of tax free income by making pension savings or charitable donations.

This might be timely as lots of people have been donating to charities for Ukraine. If you are a higher- or additional-rate taxpayer, you can get tax relief on the higher and additional rates through your tax return. 

If you are a graduate paying off student debt – or have children who are – it may be possible to reduce annual repayments by making gift aid donations or upping pension contributions. Ingram says this will not reduce the overall debt but can reduce the amount paid back within the 30-year timeframe before the debt is written off.  

Couples planning

Married couples and civil partners should review ownership of investments and assets each tax year as ownership largely determines the taxation of income and capital gains. A couple with a more even split of investments can save thousands of pounds in income tax alone, compared with a couple where one party owns the bulk of the family wealth. Doubling up the allowances for tax free investments such as Isas, private pensions, the personal allowance, CGT and inheritance tax is straightforward for those in a formal legal partnership as transfers of wealth between them are tax exempt. 

Non earners up to the age of 75 can make pension savings of up to £2,880 per tax year. This receives a 25 per cent tax subsidy increasing the savings to £3,600. Non earning higher-rate taxpayers may claim additional tax relief at their highest marginal income tax rate. This allowance cannot be carried forward and is available on an annual use it or lose it basis.

Cohabiting couples, who are not married or civil partners do not qualify for tax exemptions on wealth transfers. But they may still be able to reduce their annual tax burden by reviewing their ownership of assets.