5 tax breaks and Spring Budget pensions changes for 2023

While year-end financial planning gets most of the attention, it's almost more important to consider planning at the start of the tax year, especially in light of new changes introduced in this year’s Spring Budget that add up to some of the most significant we have seen for some years. Doing things at the start of a year gives you a whole extra year of investment returns and tax reliefs – it’s almost like free money!

Nicola Goldsmith explores the key changes that will matter for your business and your personal wealth in 2023 and how you can make the most of them to manage your pensions and investments in the year ahead.

1. Now is the time to maximise your ISA contribution

When it comes to managing your ISA, this is one of the biggest tax opportunities available for individuals to grow liquidity, tax-free. The more interest you can accrue, the more this stands to benefit you. That’s why I always recommend starting the tax year with a £20,000 investment in your ISA right away. This provides an additional year's worth of interest, which can significantly boost your returns over time.

On the maximum contribution, assuming interest of 3%, this means up to an extra £600 in interest income this year. Whilst this does not seem like a lot, it adds up, and if interest is compounded, in 24 years, your capital will have doubled in value, with no tax charge.

For those who are comfortable with a level of risk, you can also invest in a stocks and shares ISA and possibly get a better yield. There are already ISA millionaires – people who have contributed the maximum amounts to their ISAs year after year, and not extracted any growth, so that now their ISAs are worth over £1 million. Why not join them?

2. Make the most of your pension opportunity

Pensions are another area where it makes sense to maximise your contributions as early as possible in the tax year, even though you might not know how much you can contribute until you assess your net relevant earnings. Just like with ISAs, contributing as much as possible at the start of the year allows your money to grow for a longer period, making your investments work harder for you.

This tax year, there are even more reasons to contribute early that bring a measure of urgency. The lifetime allowance is being removed (and abolished from 2024/25), and the annual allowance is increasing by £20,000 to £60,000. If you have the funds available, making early contributions is an excellent strategy. It's essential to take advantage of these allowances while they last, as there's a possibility that they could be reduced after the next general election.

3. Utilise company pension contributions for tax efficiency

As a business owner, you also have the opportunity for your company to make pension contributions on your behalf. As long as these contributions are 'wholly and exclusively' for business purposes, including investment activities, your company can make payments for any employee and obtain a tax deduction. With the corporation tax rate rising to 25%, this strategy can save an additional 6% tax per annum and won't be considered a taxable benefit for the employee.

Keep in mind that you can take 25% of your pension tax-free, making this approach an effective and tax-efficient method for extracting profits from your company. By leveraging company pension contributions, you can maximise your financial benefits while minimising tax liabilities.

With pension funds also being outside the inheritance tax net, this can make even more sense for those whose assets exceed the nil rate band (£325,000 per person, until April 2028 at the earliest). At 40%, the more that is held in a pension fund, the more that can be saved on death. There may be taxes on later extraction by your heirs, but it may be possible to manage these to be lower than 40%.

4. Explore investment reliefs to reduce income and capital gains taxes

There are several investment reliefs available that can help reduce your income and capital gains taxes, especially if you're considering investing in start-ups or early-stage businesses, or even for non-UK domiciles looking to invest in the UK. These reliefs can lower your income tax liability by up to 30% of the amount invested and also defer capital gains – potentially indefinitely. If held for at least two years, these investments can even help you avoid inheritance tax.

For non-UK domiciles, these benefits can also be combined with other investment reliefs, enabling you to invest foreign income and gains in the UK without creating a remittance. This strategy allows you to support emerging businesses while also enjoying significant tax advantages.

5. Optimise inheritance tax allowances for your future

Morbid as it sounds, the earlier you think about Inheritance Tax and passing on your capital, the better. Small allowances, such as the annual exemption (£3,000 per person per year) and the small gifts allowance (up to £250 per person, but not as part of a larger gift), can add up for families with children, grandchildren, and godchildren. For example, by removing £10,000 from your estate, you can save £4,000 in inheritance tax. It is not glamourous or spectacular planning, but starting early allows you to take money out of the estate immediately over a number of years and make a difference for your heirs. Gifts given to individuals getting married are also exempt from inheritance tax, providing additional opportunities for tax-efficient gifting.

If you have more income than you need, the 'gifts out of regular income' exemption allows for tax-efficient gifting without the typical seven-year tail. This relief can be very beneficial, but it is important that you do not replace income given away with capital, and very good records need to be kept. It is very important to take advice if you are considering using this relief.

If you rely on your capital to generate income, there may be additional strategies available to remove this capital from your inheritance tax net. Remember, it's never too early to start planning for your family's future.

Supporting you through the year ahead

In today’s volatile economic environment, tax and pension legislation is changing regularly, putting more pressure on business owners to manage their obligations, but also creating opportunities to save. Many of these initiatives are likely to have a short shelf life, so it’s imperative to make the most of them while you can.

When it comes to juggling investment and working capital, it is essential to ensure you have the liquid funds you need to keep your business moving, while also not missing out on chances to save and grow your money. At Haines Watts, we work closely with our clients to build plans that take into account your unique circumstances, both now and in the future.

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