Before the end of the tax year on Friday 5 April you may be able to take advantage of several allowances to reduce your tax liability to help your money go further.
It is important to understand which allowances are beneficial to your long-term financial plan, get in touch with your friendly Financial Planner if you have any questions or need any advice.
In this newsletter we will outline the allowances that are available to use before the clock strikes midnight on Friday 5 April……but please don’t leave it that late if you have unused allowances available.
It’s also not too early to start thinking about the 2024/25 tax year!
Whilst many parts of the tax landscape have been frozen, such as the personal allowance and most income tax thresholds, that does not mean you should ignore tax year-end planning as we approach 5 April. Among the areas to consider are:
- Pension contributions: 2023/24 allowance £60,000. The Pension Annual Allowance is the maximum that you can pay into your pension each tax year, whilst still benefiting from tax relief. It covers contributions made by you, your employer and other third parties. At the start of this tax year the Pension Annual Allowance increased significantly from £40,000 to £60,000. Depending on your earnings you may be able to add more to your pension tax-efficiently in 2023/24 than in previous years. But take care – just to complicate matters further, the rules will be changing yet again from 6 April 2024.
Tax relief could make pensions a tax-efficient way to invest for the long term and you might want to consider contributing before end of this tax year. Even non-taxpayers could add up to £2,880 to a pension in 2023/24 whilst benefiting from 20% tax relief.
The Pension Annual Allowance can be carried forward for up to three years, so you have until April 2024 to use your allowances from 2020/21.
- Individual Savings Account (ISA) contributions: 2023/24 allowance £20,000. ISA’s may provide you with a way to save or invest tax-efficiently. The interest or returns on money held in an ISA are free from Income Tax and Capital Gains Tax, so using an ISA could reduce your tax bill. During 2023/24 the annual ISA allowance is £20,000 (£9,000 for Junior ISAs), which cannot be carried forward, so use it or lose it!
With the personal savings allowance frozen and the dividend allowance and CGT exemption both halving in 2024/25, the case for maximising ISAs has arguably never been stronger.
- Inheritance tax (IHT): 2023/24 allowance £3,000. If you’re worried about your estate being liable for Inheritance Tax when you pass away, gifting assets during your lifetime may be useful. The IHT “annual exemption” could provide you with a way to pass on wealth without worrying if it will form part of your estate. The allowance is individual so, if you are planning with your spouse or civil partner, you can pass on £6,000 in this tax year.
You can also carry forward the IHT “annual exemption” for one tax year. If you have unused exemption from 2022/23 you can also gift this, but only after you have used this current year’s exemption.
If Inheritance Tax is a concern, there are other steps you could take to reduce a potential bill. If you would like some help with “IHT Planning” please get in touch and we can help you accordingly.
- Capital gains tax (CGT): 2023/24 allowance £6,000. You may need to pay CGT when you dispose of certain assets. Assets that may be liable for CGT include investments that aren’t held in a tax-efficient wrapper, like an ISA or Pension and personal possessions that are worth more than £6,000 (excluding your car). Depending on the asset, you may be able to reduce a CGT bill by deducting losses or claiming reliefs. Now is the time to review your investments and consider whether to realise gains up to your annual exemption. This is particularly important in 2023/24 as the exemption of £6,000 will fall to £3,000 in the next tax year.
- Marriage allowances: 2023/24 allowance £1,260. The Marriage Allowance could allow your spouse/civil partner, to transfer some of their unused Personal Allowance to you. The Personal Allowance is the amount you can earn before you are liable for Income Tax. In the 2023/24 tax year the Personal Allowance is £12,570 If your spouse/civil partner isn’t using their full Personal Allowance they may be able to transfer £1,260 to you. This could reduce your joint tax bill by up to £252.
To be eligible you must pay Income Tax at the basic rate in England, Wales or Northern Ireland, which usually means your total income is between £12,571 and £50,270. If you haven’t claimed already, you can backdate the Marriage Allowance for up to four tax years.
- Dividend Allowance: 2023/24 Allowance £1,000. You don’t pay tax on dividends that fall within your Personal Allowance, which is £12,570 in 2023/24. You also don’t pay tax on dividends from shares that are held in an ISA.
The Dividend Allowance could increase how much you can receive through dividends before tax is due by £1,000 in the current tax year. The amount of tax you pay on dividends that exceed the £1,000 threshold will depend on which Income Tax band the dividends fall within once your other income is considered. For 2023/24 the tax rates on dividends are:
Basic rate – 8.75%
Higher rate – 33.75%
Additional rate – 39.95%
So, dividends could still provide a tax-efficient way to increase your income as the tax paid could be lower than Income Tax. It isn’t possible to carry forward your Dividend Allowance to use in a future tax year.
You should be aware that the Dividend Allowance will be reduced to £500 from the 2024/25 tax year.
- Income planning: Frozen allowances and tax thresholds mean you could move from being a basic rate taxpayer now to a higher rate taxpayer in 2024/25. Similarly, from April 2024 you might be caught for the first time by the High Income Child Benefit Charge or personal allowance taper. Actions to limit the larger tax bill include bringing forward income into 2023/24 or transferring income-generating investments to your spouse/civil partner by 5 April.
As ever when it comes to tax, it is best to seek advice before taking any action.
The information available through Alexander Grace is for your general information. In particular, the information does not constitute any form of advice or recommendation and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be taken before making any such decision. Past performance is not necessarily a guide to future performance. The value of investments may go down as well as up and you may not get back the money you originally invested.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.