In these ever-changing times, it can be financially beneficial and good practice to make the most of the allowances and tax reliefs available to us as we near the end of the 2023/2024 tax year. At Strategic Solutions, we strive to ensure that clients are utilising their available allowances and investing in the most tax-efficient ways possible so here are our Top 5 tips for tax-year end:
- Use up your ISA allowance
ISAs are a great way to save without being affected by Income Tax or Capital Gains Tax (CGT). The ISA allowance for this tax year is £20,000 and is available on a ‘use it or lose it’ basis. One of the most straightforward and effective tax planning tools is to make the most of your ISA allowance before the end of the tax year by contributing to a Stocks & Shares ISA, Lifetime ISA or Cash ISA (or a combination of the three, up to your £20,000 allowance). You are restricted to saving £4,000 per year into a Lifetime ISA and this makes up part of your £20,000 overall ISA allowance.
If you have a ‘flexible’ ISA, you are able to make further contributions (in addition to your usual ISA allowance) up to the amount that has been withdrawn from the ISA over the tax year. For example, if you withdrew £5,000 from your flexible ISA in this tax year, you could repay this amount into your ISA as well as utilising your full ISA allowance.
You could also set up a Junior ISA (JISA) for your children before the end of the tax year and utilise the full JISA allowance of £9,000. A JISA shares the same income tax and CGT benefits as a regular ISA and is a great way to save for your children’s future.
On the horizon is the new ‘British ISA’ that was announced in the 2024 Spring Budget, this is what we know so far. The idea is to allow investors to receive an additional ISA allowance of £5,000 per tax year on top of the £20,000 normal allowance. The British part of the name comes from the fact that it must be invested in British shares to qualify for the ISA wrapper and tax advantages. This is something to keep an eye on as we enter into the new tax year.
- Recover your lost personal allowance
The personal allowance is £12,570 for the current tax year and this is the level above which income tax is payable on an individual’s income. The allowance is reduced by £1 for every £2 of income over £100,000, meaning individuals with income over £100,000 may lose some or all or their personal allowance.
As pension contributions reduce your income subject to tax, it is possible for an individual to regain their personal allowance (if lost due to higher earnings) by making a pension contribution before the end of the tax year. If this pushes their income under the £100,000 mark, they will regain their full £12,570 personal allowance and could receive effectively up to 60% tax relief.
- Capital Gains Tax (CGT)
CGT is paid on the gain made when you sell certain assets. Individuals have a tax-free allowance of £6,000, also known as the Annual Exempt Amount, which can be used against capital gains. Anything up to this exemption is CGT free, with anything over it being liable to CGT. The amount of CGT payable is dependent on the amount of income tax you pay, as well as whether the asset being sold is a residential property, which are charged at higher rates.
You are able to transfer assets between spouses with no liability to CGT. This could be useful if you hold an asset individually and are expecting a gain over the £6,000 annual exempt amount. The asset, or part of it, (and therefore the gain) can be transferred to your spouse, so they can utilise their exemption too, providing it hasn’t already been used elsewhere.
In the new tax year this allowance will reduce further to £3,000. So it is important to consider whether it would be prudent to crystalise any gains this tax year.
- Inheritance Tax planning
Making the most of your available allowances can help reduce an Inheritance Tax (IHT) liability if you have one. You are able to utilise your ‘annual exemption’ or ‘gifting allowance, which is currently £3,000 each year. This will reduce the value of your estate that could be liable to IHT. Like some other allowances, this can also be carried forward to the following tax year, therefore giving a potential allowance of £6,000 if not already used.
- Saving for retirement, or looking to retire after the current tax year?
One of the best ways to save for retirement is through your pensions. It is possible to make the most of the tax year end by taking advantage of the pension allowances available.
The annual allowance for this tax year is £60,000 and this is the maximum level of contributions that you would receive tax relief on. However, this can be subject to tapering depending on your earnings. For high earners with income over £260,000, the annual allowance is tapered by £1 for every £2 of income over the limit, down to a minimum of £10,000. Making pension contributions can be particularly useful for those with high earnings that may have ‘lost’ some of their annual allowance, however you should seek advice on the amounts allowable.
If you are looking to take flexible withdrawals from your defined contribution pensions in the near future, it may be beneficial to make the most of your annual allowance before the end of the tax year. Subject to certain conditions being met, you may also be able to utilise the three previous tax years annual allowances, if available, through ‘carry forward’. As mentioned above, the current annual allowance is £60,000, although this may be tapered depending on earnings.
Once you have accessed your pension ‘flexibly’ and taken an income (i.e. the taxable element of your pension), you will trigger the Money Purchase Annual Allowance (MPAA). This will reduce the amount you can contribute to a pension down to £10,000 each per tax year, and you would not be able to utilise the ‘carry forward’ rule.
Therefore, if you feel you will need to start withdrawing from your pension after the end of the current tax year, why not make the most of your Annual Allowance for this tax year through maximising contributions before you trigger the MPAA? Or, consider whether you could take the tax-free cash element of your pension instead to fund your income needs, as this would not trigger the MPAA.
There are many things that you can do to help yourself use these allowances but we would recommend for the more technical elements you check first with your regulated Independent Financial Adviser, or if you are reading this and don’t have one, drop us a line on hello@ssfs.co.uk
