On April 5, the 2023/24 tax year comes to an end. While that may feel like a little way off, it’s likely to come around very quickly and if you haven’t made the most of the tax-benefits available to you, it may soon be too late.
With this in mind, let’s look at three important opportunities to reduce your tax burden in 2023/24 that you still have time to take.
Income Tax
You can use your pension payments or charitable giving before the April 5 deadline to potentially reduce your Income Tax liability. Boosting your pension contributions for 2023/24 could be a very shrewd way of increasing tax efficiency while helping to improve your long-term financial security.
One way you might benefit from this is if you have fallen into the ‘60% tax trap’, something you may be exposed to if you received a generous salary hike in the wake of high inflation. While the tax trap has been covered in the media, it’s not widely known about.
In brief, it means that if you earn more than £100,000 a year you could begin to lose your Personal Allowance, which is the amount you can earn before Income Tax is charged. It’s reduced by £1 on every £2 you earn, meaning that in 2023/24, you’ll typically lose all of your allowance if you earn more than £125,140.
If you do lose all of your allowance, you’ll effectively be paying a marginal rate of Income Tax of 60% up to £125,140. There is good news though, as you may be able to use your pension contributions to help reduce your earnings for Income Tax purposes.
This could be done using ‘salary exchange’, otherwise known as salary sacrifice. This is where your employer agrees to lower your income yet pay the difference into your workplace pension scheme.
By doing this, your income goes down, meaning you may be able to retain your Personal Allowance.
There are risks involved with salary exchange though, so always speak to a financial adviser to ensure it’s right for you.
Tax-free childcare
The government’s new tax-free childcare initiative means that anyone earning less than £100,000 a year in 2023/24 will qualify for the scheme. According to Money Saving Expert, while 1.3 million families are eligible for the benefit, around 800,000 aren't using it.
Broadly speaking, the scheme offers up to £2,000 a year per child towards childcare costs, including nursery, childminder and even some holiday camps. If you and your partner earn £100,000 or less each, you can qualify for it.
However, if one or both of you earn £100,001 or more, you won't. That said, as your eligibility for the benefit is based on your 'adjusted net income', you could use salary sacrifice and other pension contributions to potentially reduce your earnings to below the threshold.
Don’t forget that salary exchange can carry risk, so speak to a financial adviser to make sure it’s the best option for you.
Claim all of your pension relief if you’re a high earner
When you contribute to your pension scheme, HM Revenue & Customs (HMRC) returns the basic rate of 20% to your pension provider automatically. If you’re a 40% higher-rate taxpayer, or 45% additional-rate taxpayer, you’ll need to use self-assessment to claim your remaining 20% or 25%.
When you file your 2023/24 tax returns by January 2025, make sure you have claimed all of the pension tax relief that’s owed to you. According to PensionBee, three quarters of eligible higher- rate taxpayers and half of additional- rate taxpayers failed to claim the rebate they were owed between 2016/17 and 2020/21.
While not claiming all of your rebate may not sound like a big deal, it’s worth remembering that missing the opportunity could significantly reduce the value of your pension when you retire. As such, you may not be able to afford the lifestyle you expect when you finish work.
Wednesday 20 March 2024