Tax Year End 22/23
Why you should prepare with a financial MOT...
16 February 2023
With January firmly behind us, how has your start to 2023 been? Are you revelling in the glory of sticking to your New Years’ resolutions? Or did you join the majority by giving up before even getting started?
Unsurprisingly, doing more exercise and improving fitness topped the resolutions list; however, “in the biggest change year-on-year, 41% of Britons (who made resolutions) said they wanted to save more money, up from 30% in 2022.”
If this is you, but you have been slow off the start line, do not despair. The lead up to tax year end (5 April) provides the perfect opportunity to have a financial MOT.
“Where do we start?” I hear you all cry. Remember the basics, which is to retain an emergency fund covering 6-12 months expenditure; and, in this unprecedented time of high inflation and rising costs, leaning towards the higher end of this band might serve you well. Thereafter your actions will depend on your situation and how much excess cash and/or surplus income you have available to invest.
I will cover the better documented planning considerations later, but to start I am going to focus on a couple of other, some may say nuanced, areas of housekeeping:
State Pension top ups
To receive the full State Pension, you need to accrue 35 qualifying years. If you have not paid sufficient National Insurance contributions or received enough credits then that year will not count; however, this can be rectified by making voluntary Class 3 National Insurance contributions.
I put this at the top of my list because this is a last chance situation. You only have until the end of this tax year to check for any gaps in your National Insurance record between April 2006 and April 2016. After the 5 April 2023, it will revert to the normal situation of only being able to look back for thepast 6 years. 
The current Class 3 rate is £15.85 a week. If you have not worked at all, a payment of £824.20 (52 x £15.85) would result in one qualifying year. If you worked part of the year, the figure should be less. It is also important to note that gaps for past years should be calculated on the Class 3 rates of that tax year, meaning the amount should be lower.
Why is this so important?
Well, the current state pension is £185.15 per week (£9,628 per annum). It has also retained the valuable triple lock (for the time being at least!). This means that each year, the pension will increase by the highest of three measures: average earnings, inflation – as measured by the Consumer Prices Index (CPI) – or 2.5%. As a result, the State Pension from the start of the new tax year (6 April 2023) is increasing by an eye watering 10.1%, which in monetary terms is £204 per week or £10,608 per annum. Each qualifying year will therefore entitle you to 1/35th or £303.09 per annum gross.
Paying £824.20 to generate secure income of £303.09 per annum in crude terms can be viewed as an annuity rate of 36.8%. If the State Pension falls within your personal allowance, therefore paid tax-free, you would only have to survive three years before you made back the capital outlay. This increases to four years if basic rate tax is paid.
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Compare this to the open market annuity rates for a 65 year old turning 66 (State Pension age) of between 3.45% and 3.97%. This means generating the same level of secure income (with a similar escalation guarantee) requires a lump sum of between circa £7,635 and £8,785. The numbers speak for themselves.
Although this is likely to concern people closer to State Pension age, the younger should also take stock. Yes, you may have more working years to make up the required 35 years, however, it is very unlikely you will be able to purchase secure income so cheaply.
Let’s take my situation for example. All things being well, I have 30 years before I reach State Pension age. I checked my record and I had two unqualifying years from 2007/08 and 2010/11. I needed to contribute a combined amount of £790.80, bringing my total NI contributions for these 2 tax years to £1,077.08. In doing so, I have now added two qualifying years to my record, which equates to additional secure income of £606.18 per year. This is an effective annuity rate of 56.28%, which is higher than the example above because I am making back payments on lower Class 3 rates.
By acting now, I am two years ahead, which builds in extra flexibility to my life plan such as being able to take time out from paid employment should I wish. I also hope to remain in good health but who knows what the future holds.
How do I check?
The easiest way is to log on to your Government Gateway account and follow the directions on how to make top up payments. I encourage you to do this sooner rather than later because it can take up to 6 weeks for the payment to be applied.
Spoiler alert, this housekeeping action is for married or civil couples where one is receiving income below the personal allowance (less than £12,570) and the other pays basic rate tax (£12,571 and £50,270). If this is you, keep reading, otherwise feel free to skip to the next section!
The marriage allowance allows the non-taxpayer to transfer 10% of their personal allowance, £1,260 (10% of £12,570), to their husband or wife if they are a basic rate taxpayer.
Let’s look at an example: Jodie receives taxable income totalling £11,310. She therefore has an unused personal allowance of £1,260. Her wife, Sarah, is a basic rate taxpayer and earns £30,000 gross. By transferring 10% of Jodie’s allowance, Sarah will now pay tax on £16,170 instead of £17,430. This is a tax saving of £252. If you are eligible, this claim can be back dated to 5 April 2018. Every little bit counts!
More information can be found on the government website.
Now let’s focus our attention on what I like to term the ‘use it or lose it’ annual allowances.
The annual ISA allowance is £20,000 and, if left unused, it cannot be carried forward.
Not only is growth within an ISA tax-free, but there is no income tax payable on withdrawals. This makes them great vehicles to hold growth investments such as stocks and shares (great companies of the world).
Accumulating a pot of tax-free money during your working life is useful because it will enable a more tax efficient income plan to be built during your retirement. Who doesn’t like reducing tax where possible? If you are at the start of your savings journey, this is a good place to start after your emergency fund is sorted.
Capital gains allowance
If you have already invested money, but it does not sit within a tax-free wrapper such as an ISA, tax needs to be paid on the profit once sold (also known as the realised capital gain).
Each year, a person can realise a certain amount of profit before tax becomes payable. This is what is referred to as the capital gains allowance, and it currently stands at £12,300. However, if you haven’t heard – news flash! – this is about to be reduced. From 6 April 2023, it falls to £6,000 and then £3,000 from April 2024. Thanks Jeremy!
Therefore, if you haven’t done so already, it might be sensible to take some profit and maximise this allowance. You could then use it to either fund your ISA allowance for the next tax year or make an additional pension contribution which, as you will see below, has its own advantages.
If you are married or in a civil partnership and all investments are held in one name, then you could consider gifting your spouse sufficient assets so they can make use of their capital gains allowance too. The gift between each other should be exempt from any tax implications.
Even though this allowance is reducing, it should be utilised each year where possible because, like the ISA, you cannot carry it forward.
The trusty pension
Finally, let’s talk about the trusty pension which, if it is not already, should become your new best friend. Yes, the government has made the rules more complex than necessary, but they are a valuable tool for tax efficient saving.
- Contributions into a pension receive tax relief.
- Growth within a pension is tax free.
- You can withdraw 25%, up to the lifetime allowance tax free, which currently is £1,073,100 or higher if you hold some form of
- The balance is then taxable at your marginal rate of income tax.
My last section focuses on personal pension contributions, the associated tax-relief and how this can benefit you. Technically the amount you can pay into your pension is unlimited, but the amount of tax-relief you can receive on contributions is restricted by relevant earnings and the annual allowance.
Up until age 75, even if you do not work/have any relevant earnings, you can contribute up to £3,600 gross per annum and still receive tax-relief. This means, out of your pocket, you contribute £2,880 net. The government then tops this up with £720. Even if you did this and then immediately withdrew the full amount, as a basic rate taxpayer, the automatic uplift is 6.25%, increasing to 25% as a non-taxpayer. Although interest rates on savings accounts have improved, I would say these figures are much more attractive. This uplift does not even factor in the potential growth from the monies remaining invested.
Now let’s take a person who has relevant earnings totalling £60,000, making them a higher rate taxpayer. If they made a personal pension contribution of £7,784 net, they would receive £1,946 in basic rate tax relief, bringing the total gross contribution to £9,730. In addition, they can claim higher rate tax relief as their basic rate tax band is extended by the gross pension contribution to £60,000 (£51,270 + £9,730). This allows them to claim an additional 20% income tax relief from HMRC, bringing the total to £3,892, which equates to 40% tax relief.
As an aside, if you are the main breadwinner, you have earnings between £50-60,000 and you receive child benefit, the tax relief could be even higher. This is because the personal pension contribution reduces your adjustable net income and, depending on the amount, it will either reduce or fully mitigate the high income child benefit tax charge.
There are greater tax savings to be made as you move up the pay scale. Earnings between £100,000 and £125,140 are effectively subject because, in this bracket, you gradually lose your tax free personal allowance of £12,570 (£1 for every £2 over £100,000). This, of course, can be mitigated by contributing to your pension.
As I mentioned previously, unless you are subject to tapering, tax relief on pension contributions are restricted by relevant earnings or the £40,000 annual allowance, whichever is the lower figure.
For example, if you have relevant earnings of £20,000, you can only receive tax relief on pension contributions totalling £20,000 and not the annual allowance with the higher figure of £40,000. However, if you have relevant earnings of £90,000 then you are restricted to tax relief on £40,000, unless you have unused annual allowances within the previous three tax years that can be carried forward. The limit to only being able to go back three years means this is the last tax year to use up any unused annual allowance from 2019/20.
A lot has been covered, and in truth this article is a whistlestop tour, summarising the main areas which are tax year end sensitive. To achieve a true financial MOT, I encourage you to get in touch. We can work with you to build a holistic financial plan tailored to your aspirations and goals.
 Raven, Peter. “How Many Britons Have Made New Year’s Resolutions for 2023?” YouGov, December 28, 2022. https://yougov.co.uk/topics/society/articles-reports/2022/12/28/how-many-britons-have-made-new-years-resolutions-2.
 “Voluntary National Insurance.” GOV.UK, February 24, 2015. https://www.gov.uk/voluntary-national-insurance-contributions/deadlines.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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