Barristers – it’s time to take advantage of tax efficient allowances

End of tax year planning opportunities

We recognise the specific issues barristers face as self-employed individuals. It’s important to ensure that you take expert advice to ensure that you benefit from any tax planning opportunities before they are lost for this tax year. Here’s a reminder of some of the main areas you should consider taking advantage of:

Pensions

The Annual Allowance for contributions to benefit from tax relief is currently £40,000, or 100% of your earnings, whichever is lower. However, you can carry forward unused allowances from the past three years, provided you were a pension scheme member during those years. For every £2 of adjusted income (total taxable income including all pension contributions) over £240,000, an individual’s Annual Allowance is reduced by £1 (the minimum reduced Annual Allowance is £4,000).

There is also a Lifetime Allowance which limits the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100.

Both the Annual Allowance and Lifetime Allowance are frozen at current levels until April 2026.

Don’t forget that you can also invest into a pension for a non-working or non-tax-paying spouse or civil partner; doing so has the additional advantage of allowing them to use their personal tax allowance in retirement. Similarly, you can pay into a pension for children under 18. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, amounts to £3,600 a year.

Individual Savings Account (ISA)

The ISA allowance is £20,000 for 2022-23, which can be invested in either a cash ISA, a stocks and shares ISA, an Innovative Finance ISA or a combination of these. You can’t carry over your ISA allowance into the new tax year.

Junior ISAs

Junior ISAs are a tax-efficient way to build up savings for children and grandchildren. The maximum investment is £9,000 per child.

Gifting for Inheritance Tax (IHT) purposes

IHT thresholds remain frozen until April 2028.  Although the sums you can gift for IHT purposes are small, you should use these exemptions where possible. Gifts of up to £3,000 each tax year are exempt from IHT; any unused part of the £3,000 exemption can be carried forward to the following year.

Smaller gifts can also be made; wedding gifts of up to £5,000 for a child, £2,500 for a grandchild (or great grandchild) and £1,000 to anyone else. Individual gifts worth up to £250 are also IHT free.

Capital Gains Tax (CGT)

The annual CGT exemption is £12,300 (£6,150 for trusts) and as you can’t carry this forward, you may want to crystallise gains or offset capital losses before the end of the tax year. The annual CGT exemption will fall from £12,300 to £6,000 in April 2023 and then to £3,000 in April 2024.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

Venture Capital Trusts (VCTs)

VCTs offer growth potential by investing in smaller VCT-qualifying companies that are not listed on the main London Stock Exchange. For 2022-23 the maximum investment into VCTs is £200,000.

VCTs provide a number of tax incentives including:

• 30% upfront Income Tax relief, provided you hold the VCT for five years
• No CGT on profits
• Tax-free dividends

Enterprise Investment Schemes (EISs)

For this tax year, the maximum investment in EISs is £1 million (or £2 million as long as at least £1 million of this is invested in knowledge-intensive companies). Tax incentives are a feature of EISs and include:

• 30% upfront Income Tax relief, provided you hold the EIS for three years
• No CGT on profits after three years
• No IHT after two years

In recent years, both EISs and VCTs have gained significant popularity amongst wealthier investors and both schemes undoubtedly remain an attractive proposition for experienced investors looking to maximise tax-efficiency and diversify their portfolios.

Both EISs and VCTs are high risk investments. This enhanced risk element stems from the fact that EISs and VCTs invest in small, fledgling, and therefore typically fragile enterprises.  There may be no market for the shares should you wish to sell them and it could therefore be difficult to make a disposal.  You may lose all your capital.

Please contact us if you have any questions or want to discuss any aspect of your end of year tax planning. We look forward to hearing from you, click here to contact us.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.