While 2023 has ended, the 2023/24 tax year continues until 5 April 2024 – PFM details your tax-free allowances for the tax year to make sure you are utilising them all.
If your tax year ends on 31 March 2024, you only have two months left to invest in plant and machinery and receive tax relief in the 2023/24 accounts. Perhaps you are planning on purchasing a new pair of loupes, or maybe a new dental chair for the practice. This needs to be agreed before 31 March 2023. If these are agreed afterwards you will have to wait another 12 months for the benefits of the tax relief.
HMRC will allow the asset to be included in the business once it is in use by the business. If you have purchased the asset using a hire purchase agreement, the asset can be considered to be owned by the business on the day it is delivered. If you are planning on purchasing any equipment and wanted to check the tax relief that you would get on this, please speak to your accountant.
What tax-free allowances are available?
Each person gets certain allowances from HMRC that it is important to be aware of. For the 2023/24 tax year the main allowances are:
- Personal allowance
- Dividend free allowance
- Savings allowance
- Annual exempt amount.
Personal and dividend free allowance
We are all familiar with the personal allowance. For the 2023/24 tax year this has remained at £12,570. There will be no income tax applied to the first £12,570 of your earned income for the year. The dividend allowance is in addition to your personal allowance and is £1,000 for the 2023/24 tax year. This means that the first £1,000 of your dividend income in the year is tax free.
The savings allowance covers taxable income such as bank interest. The savings allowance does depend on if you are a basic, higher or additional rate tax payer. For a basic rate tax payer, the first £1,000 of your savings income is tax free. This drops to £500 for a higher rate tax payer and nil if your highest tax rate is the additional tax rate.
There are important thresholds to think about too. Currently, any child benefit will need to be repaid if your earnings are over £50,000. This is restricted as 1% for every £100 of income above £50,000. If your income is above £60,000 for the year, you need to repay the child benefit you have received annually. The child benefit you receive has to be reported on the tax return of the highest earner in the household.
If your income for the year is £100,000 or upwards you will start to lose your personal allowance for the year. Your personal allowance is restricted £1 for every £2 above £100,000 you earn. If for example you earnt £110,000, your personal allowance would be restricted by £5,000. This would leave you with only £7,570 of tax free personal allowance for the year.
Annual exempt amount
The final allowance is the annual exempt amount that is offset against any capital gain made during the year. Capital gains are charged when you make a profit on selling an asset. This could be the sale of shares held in a business, crypto currencies that you hold or the sale of a rental property. The annual exempt amount is £6,000 for the 2023/24 tax year. This is scheduled to drop to £3,000 in 2024/25.
The chancellor will be delivering his next budget on 6 March, where we will be given an indication of any changes to the tax-free allowances.
As the tax year draws to a close on 5 April, time is running out to maximise your annual tax allowances such as individual savings accounts (ISAs) and pension contributions. To ensure you’ve optimised your financial situation, it’s crucial to make the most of available tax-free allowances before the deadline, as most of these allowances do not carry over to the next year.
Individual savings accounts (ISAs)
Make sure you’ve utilised the £20,000 annual allowance for individual savings accounts (ISAs), providing a tax-efficient way to save and invest. ISAs offer advantages such as no income tax on interest from cash savings or dividends from shares.
With upcoming further reduction to the annual tax-free dividend allowance, saving in an ISA can help mitigate the impact. Additionally, contributing up to £9,000 annually to a junior ISA for each child or grandchild is a tax-efficient way to invest for their future.
In the 2023/24 tax year, the tax-free personal allowance, representing the income threshold before tax applies, stands at £12,570. This allowance, along with tax rates, will be maintained at this level until April 5 2028 throughout the UK.
For UK taxpayers (excluding Scottish taxpayers), the basic rate remains fixed at £37,700. The higher-rate trigger starts at £50,270. The additional-rate threshold is set at £125,140, with a caveat: the personal allowance diminishes by £1 for every £2 exceeding £100,000 in ‘adjusted net income’. If earnings surpass £125,140, the individual loses the benefit of the personal allowance.
This implies that the effective tax rate within the £100,000 to £125,140 income range can soar to 60%. Fortunately, strategies exist to circumvent this issue, such as making pension contributions, leveraging gift aid on charitable donations or a combination of both.
The government actively encourages saving for retirement by offering tax relief on pension contributions. Utilising these contributions and charitable donations strategically can help plan and potentially reduce taxable income, preventing it from breaching £100,000 and incurring the 60% effective tax rate.
Consider your pension fund as a highly tax-efficient means of saving for retirement. You may contribute up to £60,000 this year, with potential rollover of unused allowances from the past three years.
To assess your pension eligibility, you may need help from a specialist dental financial adviser who can calculate your remaining allowance after taking into consideration earnings, NHS pension membership and the annual allowance rules.
If you would like to speak to a dental specialist accountant or independent financial advisor, please get in touch. The easiest way to do this is to complete the contact us form on our website, link here pfmdental.co.uk/contact/.