Posted on 23/02/2024 by Sue Stevens
We know we shouldn’t leave things until the last minute, yet many of us still do. This can be particularly true when it comes to maximising our annual tax allowances and exemptions.
Despite having 366 days to get our affairs in order (well, this year at least), all too often we find ourselves scrambling to get some spare cash into ISAs and pensions in the final hours before the tax window closes.
The good news is, there’s no need to panic, you still have time.
Here are a few things you can do to get your tax affairs in order before the 5th April deadline.
ISAs are an effective way to save and invest for your financial future. With an allowance of £20,000, and tax-free growth and income, there’s lots to like.
With the annual exemptions to capital gains tax (CGT) and dividend tax being slashed from 6th April 2024, investing as much as you can in tax-free wrappers is arguably more important than ever.
The most common ISAs are cash, and stocks and shares - which one is right for you comes down to your personal circumstances, future goals and attitude to risk. But as a rule of thumb, if you are comfortable with the value of your savings moving up and down and are looking to invest for a period of five years or more, then stocks and shares might be the best option to grow your money.
This tax year (2023/23), the annual CGT exemption (the profit you can realise each year without paying tax) of £12,300 was slashed to £6,000. This will halve again to £3,000 from the 6th April 2024.
With vastly reduced allowances, and CGT tax rates of up to 20 per cent (or 28 per cent if you’re selling a second home), failing to use the higher allowance while you still could be costly.
Even if you have no plans to use the money, for any investments you hold outside of tax wrappers it might make sense to use your allowance and shift the proceeds into either a pension or an ISA.
Paying a lump sum into your pension before 5th April will not only give your retirement savings a welcome boost, it can also help you pay less income tax or reduce your business’ corporation tax bill.
Paying into a pension can even enable you to retain valuable state perks such as child benefit (which reduces for anyone earning above £50,000) and your personal income tax allowance.
In most cases, the maximum you can pay into a pension each year and receive tax relief is the lesser of £60,000 or 100 per cent of what you earn. But as this figure could be higher or lower depending on your personal circumstances, it is important to seek advice before paying in hefty lump sums.
What’s more, any growth, interest, and income is free from tax, and if you were to die before you reach age 75, unless you have bought an annuity without spouse’s protection, anything left in the pot will pass to your heirs, again tax free.
With a flat rate of 40 per cent, it can take a sizeable chunk out of your offspring’s inheritance.
But it is for good reason that IHT was once dubbed “the voluntary tax” as there are numerous ways that it can be mitigated or even avoided completely.
Every year you can give away £3,000 without inheritance tax applying, called the annual exemption. What’s more, if you didn’t give any money away last year, you can carry forward a further £3,000, raising the total to £6,000, or £12,000 for a couple.
Anything you gift above £3,000 might still be tax free as long as you can prove it came out of normal expenditure. If you can't, it will be classified as a potentially exempt transfer, or PET for short, which becomes IHT-free if you survive seven years after the gift was made. Making a PET can still often prove worthwhile, but it is key to seek professional advice first.
From helping them onto the property ladder to giving their retirement savings an early boost, putting money away for a child’s future can be one of the greatest gifts they receive.
Every year you can pay £9,000 into a Junior ISA for your child, with the money accessible to them at age 18. As with all ISAs, growth and income are free from tax, and anything you pay in does not count towards your own £20,000 ISA allowance.
If you don’t like the idea of your child receiving a large lump sum at age 18, another option is a pension, which is an effective way of giving your child’s retirement savings a head-start.
You can pay in up to £2,880 a year, grossed up to £3,600 due to tax relief, and like an ISA, there’s no tax to pay on any growth and income within the pension. However, you must be aware that, under current rules, the earliest your child will be able to access the money is age 57.
Tax can be complicated, and making the wrong choice could move you further away from your financial goals. If you’re interested in any of the ideas detailed here, please contact us and we will be happy to help.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
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