Besides thinking about your New Year’s resolutions, now is the best time to start organising your tax situation before the tax year ends on 5 April.
The tax planning program must include ways to maximise your ISA allowances for 2023-24, presently at £20,000 each. Additionally, you might consider re-thinking about boosting your pension contributions before 5 April 2024, as the unused yearly pension allowance from the tax year 2020-21 is about to expire after three years.
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Many of us will gather with family at Christmas, which made us think of updating or making our Will. This guide will share a few essential measures to consider this year to improve your tax position and reduce tax liabilities. Improving your financial health or at least staying on top of your money will be the best New Year resolution.
Table of contents
- Time to review or make a will?
- Passing on the family home
- Leaving money in your Will to charity
- Year-end inheritance tax planning
- Regular gifts out of your income can save IHT
- Pension contributions on behalf of others
- Update payroll software for the January NIC cut
- Advisory fuel rate for company cars
- Diary of main tax events
- Final thoughts!
Time to review or make a will?
One of the essential things to add to the New Year’s to-do list is making or updating their Will. Many people believe this should wait until later in life, but once properties are acquired or children are born, it’s critical to set things in place.
If you pass away without making or updating your Will, your assets are divided according to the statutory rules. These statutory intestacy provisions may not be tax efficient, so you may want to include special provisions about your unmarried partner or your children’s guardianship in your Will.
Individuals often believe their spouse or civil partner will automatically inherit everything if they pass away without leaving a Will, but this isn’t always the case.
- The intestacy provisions in England specify that if a death occurs on or after 26 July 2023, the surviving spouse will get half of the real estate assets, all personal effects, and a statutory legacy of £322,000.
- The other half of the estate would be equally divided among the surviving children of the deceased or descendants.
- The inheritance is retained for those descendants until they reach the age of 18 if they are under the age.
- These intestacy provisions differ in Scotland, Wales, and Northern Ireland.
Passing on the family home
While making or updating your Will, remember that the IHT (Inheritance tax) zero rate band remains at £325,000, barring any changes in the Spring Budget. There is currently an additional zero rate band of up to £175,000 for passing on the family home to direct descendants upon death.
In cases where a first spouse dies and leaves some of the nil bands unused, the remaining amount becomes available upon the surviving spouse’s death. This may potentially free up assets worth up to £1 million at current rates for a married couple or civil partners without paying IHT.
You can still access the residence nil band even when you switch to a less expensive property. In case when a married couple decides to switch from their larger property worth £500,000 to a smaller home costing £300,000 flat, they will still be eligible for inheritance tax relief on the higher valued property even if they give away a portion of the income during their lifetime. They may continue to profit from this zero band even if they sell the house and move into a care facility rental property.
Leaving money in your Will to charity
The inheritance tax rate on the amount owing is lowered from 40% over the nil rate bands to just 36% if you donate at least 10% of your assets to charity. This should be carefully studied as it might decrease the amount that passes to other beneficiaries.
Year-end inheritance tax planning
Many of us expect the chancellor to announce potential inheritance tax IHT reductions or eliminations in the Spring Budget, but it is worth utilising the £3,000 gifts annual exemption for 2023-24 and, if available, the unused amount from 2022-23.
However, remember that £3,000 is the total exemption for the tax year and not the sum for each completed. Larger amounts can be donated or given away by taking advantage of the exemption for regular gifts out of income.
Regular gifts out of your income can save IHT
One potential avenue for tax planning that many believed the chancellor might limit was the inheritance tax exemption for regular gifts made from a person’s excess income. Since the purpose of inheritance tax is to tax capital transfers, transfers made out of surplus income are not subject to inheritance tax (IHT) if the donor can prove it.
The exemption will apply if there is a regularity of the payments, for example, a standing order to cover children’s or grandchildren’s tuition fees or pension contributions on their behalf. HMRC will additionally need evidence that the contributions are made from the donor’s post-tax income and do not interfere with their regular way of life. You must keep comprehensive records, and we can assist you with an appropriate spreadsheet.
Pension contributions on behalf of others
Payments made by a person into a pension plan are typically capped at their applicable earnings for that particular tax year. When contributions total less than £3,600 gross, this restriction does not apply, enabling parents and grandparents to make payments on behalf of their low-income children and grandchildren. Payments of £2,880 per year might trigger a 25% government uplift, and this uplift could become significant by the time the child reaches retirement age (now 55, but rising to 57 in 2028). If a standing order was established for no more than £240 per month, the parent or grandparent might be able to demonstrate that the payments qualify for the above-mentioned regular gifts out of income exemption from inheritance tax.
Update payroll software for the January NIC cut
The national insurance contributions (NICs) for employees will be lowered by 2%, as announced by the chancellor, for payments made on or after 6 January, 2024. Payroll software updates are not given much time in this scenario, especially with the Christmas holidays thrown in. It should be noted that NIC is not computed cumulatively for employees other than directors, meaning that in cases when over-deductions are made, the error will not be automatically fixed in future months.
Advisory fuel rate for company cars
The HMRC’s recommended fuel prices as of 1 December, 2023, are shown in the table below. The recommended reimbursement rates for employees who use corporate vehicles for personal travel are as follows.
These are the sums that can be paid for business travel without the amount being taxable on the employee in cases when the employer does not provide fuel for its company vehicle.
| Engine size | Petrol | Diesel | LPG |
| 1400cc or less | 14p (13p) | 10p | |
| 1600cc or less | 13p (12p) | ||
| 1401cc to 2000cc | 16p | 12p | |
| 1601cc to 2000cc | 15p (14p) | ||
| Over 2000cc | 26p | 20p (19p) | 18p (19p) |
Any changes in the rate have been mentioned in brackets beside the current rates.
Additionally, you have up to one month from the date the new rates take effect to continue using the old rates. Please take note that the petrol or diesel rate applies to hybrid cars.
Diary of main tax events
January/February 2024
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Final thoughts!
We have listed a few of our New Year resolutions for you in today’s guide. You can try to complete one or two at a time or take on the challenge of following them all. However, make sure to set realistic targets and time frames such that they are actually achievable.