Financial Planning Opportunities to Consider Ahead of UK Year End

Written by Andrea Solana, CFP™

With a new year, comes the opportunity to review financial plans and take stock of current wealth strategies that are being deployed to help support your various goals and objectives. While a new calendar year means that most 2023 US planning opportunities are now behind you, there remain some easy wins to consider from both a US and UK perspective as you quickly approach the end of the 2023/24 UK tax year on the 5th of April.

Consider ways to manage your UK taxable income to maintain access to certain allowances

The additional rate band applies to income above £125,140 which means that income and dividends attract a rate of 45% and 39.35%, respectively.  For every £2 that an individual’s net income exceeds £100,000, the UK personal allowance is reduced by £1, meaning that individuals within this tapering threshold suffer an effective top tax rate of 60%. Additionally, the dividend allowance for TY2023-24 is £1,000 reducing further to £500 in the next tax year.

Separately, when parents are employed and both individually earn less than £100,000, it is possible to receive up to £500 tax free every 3 months (up to £2,000 per year) per child to aid with the cost of approved childcare for children aged up to 11. Parents must open a childcare account and for every £8 deposited, the government will pay in £2 to use to pay your provider. Parents lose this benefit if one earns more than £100,000.

Looking for ways to manage your overall UK net income, especially around the £100,000 level, can lead to dramatic tax savings. A focus on maximising tax deferred and tax exempt investments, optimising pension contributions, making charitable contributions and limiting exposure to income yielding assets for a higher earning individual, are all ways to help manage taxable income.

2023 carry back contributions to an IRA remain available during Q1 2024

Those individuals who have deemed earned income to allow for contributions into US retirement plans like a Traditional IRA or Roth IRA, have the opportunity to make a 2023 contribution until the 2023 tax filing deadline. This annual allowance is ‘use it or lose it’ so if you didn’t take advantage of maxing out your IRA for the prior US tax year, a carry back contribution allows you to receive those benefits before taking advantage of this year’s contribution allowances. Provided you will also have applicable earnings in 2024, you can consider making both years contributions at the same time to provide for a more sizable sum of money to be added to the tax advantaged investment pot at once.

For 2023, the IRA contribution allowance is $6,500 for individuals under the age of 50 and is $7,500 for those aged 50 or older in 2023. For 2024, the IRA contribution allowance is $7,000 for those under age 50 and $8,000 for those aged 50 or older.

It should be noted that for any self-employed individuals, SEP IRA contributions may also remain a option to consider prior to filing your 2023 US tax returns.

Consider maximising your UK pension contributions 

When planning for retirement and looking for ways to manage your UK taxable income it can be  beneficial to consider a contribution to your UK pension. Contributions to a UK qualified pension will reduce UK taxable earnings and will provide a tax deferred savings opportunity from both a US and UK perspective (where tax relief may be limited in the US, individuals often have excess foreign tax credits available to make up the difference). You can contribute up to 100% of your earnings each year, or up to the annual allowance of £60,000, whichever is lower, (tapering down to £10,000 for individuals with earnings between £260,000 and £360,000) and you can also carry forward any unused allowances from the prior three UK tax years.

Utilise your UK capital gains tax allowance

For the current UK tax year, individuals can realise up to £6,000 in capital gains before any tax is payable. This annual allowance is set to decrease to £3,000 in TY2024/25.

The exemption is available to each individual and, like IRA contribution allowances, is a ‘use it or lose it’ exemption. Where gains sit solely with one individual, married spouses could consider a transfer of assets between them on a no gain or loss basis to allow both individuals to full use the exemption. Additionally, if one spouse is a basic rate taxpayer where gains would be taxable at a lower 10% rate, one could consider transferring assets to the lower earning spouse to realise any taxable gains but ultimately pay a lower rate.

Individuals who are not yet considered deemed domicile should keep in mind that the ability to offset any offshore losses against gains is limited unless something called the Offshore Loss Election has been (or can be) made.  Additionally, one must consider foreign exchange movements over your period of ownership when calculating gains and you should also be conscious of the ‘Bed & Breakfast’ rules, whereby repurchasing a liquidated asset within a 30-day period can result in any gains (or losses) not truly being recognised. 

Consider maximising your ISA allowance

UK residents who are 18 or older can invest up to £20,000 each tax year into an ISA. Additionally, parents can fund a Junior ISA with up to £9,000 per child. As with other allowances, it is a ‘use or lose it’ allowance to take advantage of.

As an ISA is a flexibly accessible UK tax exempt vehicle, it can be utilised for pre-retirement and retirement savings goals and can also be used to help support higher education expenses. It is important to remember though that ISAs are not tax exempt in the US, so one needs to ensure that any investments held within the ISA wrapper are tax efficient from a US tax perspective (for example, in order to avoid the negative tax treatment and reporting requirements associated with holding PFICs you should favour individual equities or individual bonds versus fund investments). Despite this, ISAs can still be a useful savings tool for many when tax efficient investments are held as one can save the tax differential between the UK and the UK on specific types of income.

With political elections in both the UK and the US taking place in 2024, it can make sense for individuals to consider taking advantages of current US and UK allowances in place if it supports your broader financial objectives as it is unknown what specific changes may be on the horizon.

The Legal Stuff

This document may not be forwarded, copied or distributed without our prior written consent. This document has been prepared by MASECO LLP for information purposes only and does not constitute investment or any other type of advice and should not be construed as such. The information herein is based on MASECO’s understanding of current tax law and practice. It does not constitute tax advice. The information contained herein is subject to copyright with all rights reserved.

The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof. All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change. The levels and bases of, and reliefs from, taxation is subject to change. The tax treatment depends on the individual circumstances of each individual and may be subject to change in the future.

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