It doesn’t feel like long since we were packing away our Christmas tree and celebrating a new year with a list of resolutions, but supermarkets are already full of Easter eggs and we are rushing head first into ‘tax year end’ season.
Our clients will have already had conversations about this with their planner, but here is a useful checklist of the allowances available before the end of the tax year on 5th April 2024:
A real ‘use it or lose it’ allowance of £20,000 per person in each tax year, giving you freedom from Income and Capital Gains Tax, allowing your money to grow and be withdrawn tax free. ‘Stocks and shares’ ISAs are our preference for long term money to provide inflation-proofed growth without tax on gains, but if you are not in a position to commit longer term, consider a ‘cash’ ISA which can be transferred to a ‘stocks and shares’ ISA in the future. Lifetime ISAs can be used to purchase a first home or save for later life if you are over age 18 and under 40. You can put in £4,000 (this counts towards your total £20,000 allowance) each year until age 50 and the government will add a 25% bonus.
Annual Gift Exemption for Inheritance Tax
For those seeking to gift monies to their family, you can reduce the value of your estate for Inheritance Tax (IHT) purposes by using the £3,000 gift allowance, and you can use any of last year’s unused allowance too. There are also birthday and Christmas gift allowances of up to £250 for family members and gifts out of normal expenditure allowances to consider.
Investments for children
You can make pension contributions for children or grandchildren of up to £3,600 each and subscribe up to £9,000 each into Junior ISAs.
Using Capital Gains Tax Allowance
Capital gains are likely to be more of an issue in future years as the annual exemption reduces from £6,000 to £3,000 from 6th April 2024. It might be worth considering selling taxable assets for next year’s ISA allowance as well as this year’s to make use of the higher capital gains exemption of £6,000.
A change in last year’s Spring budget increased the amount you can save into a pension to £60,000 or your total pensionable income, whatever is lower. A ‘carry forward’ rule allows you to bring forward any unused allowances from the previous 3 tax years which could increase your allowance to £180,000 (£60,000 this year and £40,000 from the 3 previous tax years) if your earnings are high enough. Even non-earners can make contributions of up to £3,600 and secure tax relief. You contribute £2,880 and tax relief tops this up to £3,600 automatically. For those with income over £200,000, remember that annual allowance could be tapered, reducing the amount you are permitted to contribute. The Spring Budget also announced the removal of the Lifetime Allowance but as this is a complex area and the rules have not been fully introduced, it is worth seeking financial advice if you are looking to make big pension contributions or if your pension is of significant size.
Business owners can make employer contributions from their business to their pension (please always check with your accountant as it needs to justifiable) brining an additional benefit of corporation tax relief on contributions. Again, it is worth seeking financial advice if looking to make significant pension contributions from your business.
Making withdrawals to fund retirement
It may be worth considering how you take your retirement income in order to ensure you make full use of your income tax and capital gains tax exemptions. Building a tax efficient retirement income is a key aspect of our service.
Income tax: We all have £12,570 personal allowance at 0% income tax which can be filled up by pension income or other taxable income. At the higher end, you lose your personal allowance by £1 for every £2 your net income is above £100,000, an effective rate of tax of at least 60% (the cumulative effect of 40%/42% higher rate tax plus the loss of your tax-free personal allowance). Pension contributions and charitable donations are useful ways to reduce your net income to regain some or all of this.
In Scotland, there are a greater number of tax bands and thresholds that mean making an extra pension contribution could be beneficial, whether to keep you within a certain band, reclaim personal allowance or to avoid the High Income Child Benefit Charge (which kicks in at £50,000 of income).
Dividend tax: Remember that each of us has a dividend allowance of £1,000 each year, but that this reduces to £500 from 6th April 2024.
Personal savings allowance: Basic rate taxpayers have an allowance of £1,000 for interest from banks and the like, higher rate taxpayers have £500 and additional rate taxpayers lose this allowance altogether.
Venture Capital Trusts (VCT), Enterprise Investment Scheme (EIS) and Seed EIS: These are government initiatives designed to assist small to medium sized enterprises which each have unique and beneficial tax incentives across Income tax, Capital Gains tax and Inheritance tax. The increased investment risk of these type of investments must be considered along with the tax opportunities that they present.
State pension rule changes: The transitional rules allowing you plug your National Insurance record gaps whenever they occurred, was extended to 5th April 2026, after which it will revert back to the normal 6-year rule.
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The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action. Tax and Estate Planning Services are not regulated by the Financial Conduct Authority. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
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