Tax year end – do you know your allowances?

As we approach the end of another tax year (5th April), now is an ideal time to look at your finances and make the most of the allowances available.

Chartered Financial Planner, Emma Cherrington gives you all the information you need here:

  1. Pension contributions

Pensions offer a tax-efficient way to invest for the long term. With tax-relief on contributions, tax-efficient growth within the pot and when accessing the pension, 25% of the fund is completely tax-free. A pension is a long-term investment though; you cannot access this fund until age 55 (this age is due to increase to 57 in 2028).

There are many ways that you can access your pension monies once you reach the relevant age to provide you with a flexible income in retirement (since Pensions Freedoms were introduced).

You can receive tax-relief on contributions of up to 100% of your relevant earnings (e.g. your salary and bonus), but you can only receive tax-relief on earnings in the current tax year. Higher earners could even help mitigate the impact of losing their personal allowance or child benefit payments with a pension contribution. Employees may also consider taking a bonus as a pension contribution, should their employer be happy to do so, and business owners could consider taking profits as a pension contribution. These are all fantastic ways to mitigate your tax and increase your net income, while building your retirement pot for later.

As a business owner you can opt to make contributions as an employer pension contribution from pre-tax company income, rather than making a personal pension contribution as an employee. This means that you’re able to pay the full £60,000 a year (subject to any potential reduction by the tapered annual allowance) into your pension and receive the available corporation tax relief between 19-25%.

For those with lower (below £3,600) or no earnings this tax year, pension contributions of up to £2,880 net can still be made, meaning that a maximum of £720 would be added to your pension pot in tax-relief.

In addition to tax relief, you may need to consider the annual allowance, which limits contributions to £60,000 in the current tax year.  However, most of us can carry forward any unused annual allowance from the 3 previous tax years. This can be subject to complications including ‘tapering’ for higher earners and the money purchase annual allowance for those with flexibly accessed pensions.  This is a complicated area and again, we strongly recommending that you seek professional financial advice.

Pension planning is a fantastic tool to reduce your tax now, build for your future retirement, and pass monies tax efficiently onto others by way of inheritance as usually pensions are outside of your estate for inheritance tax purposes.

  1. Income Tax

The freeze on the personal allowance and the basic and higher-rate income tax thresholds in England and Northern Ireland was to April 2028.

However, the previous reduction of the additional rate income tax threshold announced in the 2022 Autumn statement from £150,000 to £125,140 estimated that around 250,000 taxpayers will be pushed into this higher tax band, paying 45% tax on any income above the new limit.

Lowering the additional rate means someone earning £150,000 will pay an extra £1,200 income tax per year. This highlights the importance of financial planning and considering pension contributions to reduce the amount you pay tax on.

  1. ISA allowance

Individual savings accounts (ISAs) are simple and putting your savings or investments into an ISA keeps your money free from tax. This is a ‘use it or lose it’ allowance, though so make sure to act before the tax year ends. Utilising your ISA allowances is especially important for tax payers as you will pay tax on savings interest over £1,000 for basic rate tax payers and £500 for higher rate, and those who will always be a tax payer throughout retirement.

In 2023/24 you can protect up to £20,000 using your ISA allowance. This allowance can be split between different types of ISAs including stocks & shares, cash, lifetime or innovative finance ISA. However, the lifetime ISA limit is capped at £4,000, so if you do use this allowance, you can add the remaining £16,000 into any of the other ISA options.

For couples, the allowance means a max of £40,000 could be sheltered within an ISA (or ISAs) in one tax year. In addition, on death your spouse can inherit the value of your ISA meaning the monies will stay within the tax efficient ISA wrapper.

For children, you may also consider the junior ISA with an allowance of £9,000 this tax year.

Where you are investing into an ISA, always consider speaking to an independent financial adviser before proceeding.

  1. Capital Gains Tax

When we profit on something, we create a capital gain. Most things like our home, cars and typical household possessions are exempt from tax concerns. However, investments and shares held outside of tax wrappers (such as a pension or ISA), properties other than our home and some other items, when sold at a gain can become subject to capital gains tax (CGT).

The tax-free allowance is £6,000 for 2023-24, but from this coming April this will be dramatically cut to £3,000.

To make the most of this allowance you can switch between similar investments or make use of a spouse’s allowance by transferring assets between spouses. You can also use capital losses to offset gains, with previous losses available to carry forward indefinitely, providing you have notified HMRC of the loss within 4 years of it occurring. CGT planning can be very complex, so again please do speak to an independent financial adviser.

The CGT rates that apply after the tax-free allowance will remain the same, and depend on whether you are a basic-rate or higher-rate taxpayer:

Tax bandTax rate for property saleTax rate for other asset sale
Basic-rate18%10%
Higher-rate28%20%

 5.Dividend Tax

The dividend allowance will also be cut from £1,000 to £500 from April 2024.

The rates of dividend tax, are currently:

Income tax bandDividend tax rate 2023-24
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%

6.Inheritance Tax (IHT)

Depending upon factors such as your age and the value of your estate, you may want to reduce your potential inheritance tax (IHT) bill. There are a number of IHT allowances that are time and tax year sensitive. Using these allowances might mean you can mitigate the IHT charge of 40% on estates over £325,000, although the residence nil rate band (which can be up to £175,000) is now helping many to remain outside of IHT issues, so please check your potential liability first.

To begin with, there is the £3,000 gift exemption; you can reduce your taxable estate here without any complications and you can also carry forward any unused gift allowance from the previous tax year.

There is also the £250 small gifts exemption. You can make as many gifts of up to £250 per person, per tax year as you wish free of IHT. This is, however, providing the recipient is not also part of your £3,000 annual exempt amount.

There is also the gifting under ‘normal expenditure’ exemption. If you start up regular gifts of any amount, this is usually exempt from any IHT concerns, providing this does not impact your own standard of living.

Keeping a record of any gifts will help make things a lot easier for the executors of your estate. IHT planning can potentially save significant amounts of tax, so it is always worth having a professional review of your own circumstances if you have any concerns.

7.Marriage and other allowances

In addition to the above areas, if you are married and your spouse is not using their full personal allowance and you’re a basic rate taxpayer, you can also claim the marriage tax allowance.

And if you are nearing state pension age, you can boost your state pension if you are not likely to receive the full entitlement or even making the most of the personal savings allowance/dividend allowance.

These small allowances could help you save money this year.  However, we always advise that you speak to a professional who can help you plan for the long term and ensure your finances are up to date.

#TheClearAdvantage

The content of this blog is for information only and must not be considered as financial advice.  We always recommend that you seek independent financial advice before making any financial decisions.

Levels, bases of and reliefs from taxation may be subject to change.

The Financial Conduct Authority does not regulate taxation and trust advice.  Active Chartered Financial Planners recommends you speak to a Tax Adviser/Accountant for this; Active would be happy to introduce you to one of our close partners.

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