5 Mins
The end of the tax year is swiftly approaching making it an opportune moment to assess not only the available tax allowances, but also to give your overall financial picture a thorough spring cleaning.
In recent budgets, several crucial changes have been made to certain allowances, necessitating a nuanced understanding of their interactions with each other, and their implications for your broader financial strategy.
Capital Gains Tax (CGT) and other tax allowances
The Capital Gains Tax Allowance stood at £12,300 in the 2022/23 tax year, dropping to £6,000 at the beginning of the 2023/24 and reduced further to £3,000 in 2024/25 and will remain the same in 2025/26. This reduction means a diminishing capacity to sell appreciating assets before CGT becomes payable.
Assets such as investment funds and direct shareholdings commonly attract CGT, especially when not held within a tax wrapper. As investment funds are often liquidated to fund an ISA contribution, the lower CGT allowance complicates the maximisation of the £20,000 ISA allowance.
If sufficient allowance remains available, it could be useful to sell some assets in the current year to deal with the continued low allowance in the new tax year, as unused allowance cannot be carried forward.
The dividend allowance remains £500, so any dividend income is more likely to attract income tax in the new tax year. This is relevant for any shareholdings you may have.
With interest rates at a 15-year high, individuals holding cash on deposit may surpass the savings allowance (£1,000 for basic rate taxpayers and £500 for higher rates). Cash held within a Cash ISA is income tax-free, emphasising the importance of structuring cash holdings appropriately.
Now may also be a good time to consider what other tax-wrappers are available to meet your longer-term goals.
Pension Allowances
The Annual Allowance increased to £60,000 in 2023/24, a significant rise from the £40,000 in place since 2014/15. This, coupled with the abolition of the Lifetime Allowance, makes pension contributions more attractive than ever. Leveraging this can be a strategic planning tool, potentially reclaiming your personal allowance for those earning over £100,000 or offsetting child allowance for those earning over £60,000.
Pension contributions can also be a useful way of getting money out of a company too where the employer makes a pension contribution and claims relief against Corporation Tax.
For those who were previously close to, or over, the Lifetime Allowance or had Annual Allowance issues, pension contributions are certainly an option again. This, coupled with the ability to pass money down the generations outside of your estate, means a revisit of your pension plans to make sure you have the right type of pension contract may be worthwhile.
For anyone who isn’t maximising their pension contributions, it is possible to go back three tax years and carry forward any unused allowance. This is subject to maximising the current year’s allowance first and having sufficient earnings to allow a sizeable contribution.
The most recent budget introduced new legislation that means pension pots are included in an estate for IHT purposes. This is nearly 2 years away but, understanding how this may impact you now or in the future and what changes should be made will be important.
ISAs
ISAs have already been mentioned, but just to reconfirm, there are a number of different forms of ISA.
Cash and Stock & Shares are the most common and there is a combined limit of £20,000 and this can be split across the two.
Junior ISAs can be opened by a parent for their children under 18. The limit is £9,000.
There is also a Lifetime ISA for those between 18 and 39. This type of ISA is designed for those saving for a house primarily but can also be used for retirement savings. There is a government bonus of 25% added to each payment. There are, however, strict rules and penalties for taking money apart from the scenarios mentioned.
Inheritance Tax
As the year concludes, contemplating gifting money out of your estate becomes pertinent if Inheritance Tax is a concern. This could involve leveraging annual gifting allowances or making contributions for ISAs or pensions for other family members. It’s important to note that such contributions must come from surplus income, and one cannot compromise your standard of living to do so.
The pension changes noted above add a frustrating extra layer of complexity around where to draw assets from and may mean existing plans need changed to accommodate the additional funds within an estate.
There have been some changes to other allowances in addition, so having a review and understanding what the long-term holds for your finances is more important than ever.
Financial Planning Consultant
I have been a Financial Adviser since 2019 and have nearly 25 years of experience in financial services.
I work across areas such as financial protection and investments, however, my passion lies with pensions and retirement planning, and I have extensive experience advising on matters around Annual and Lifetime Allowance.
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As always, we are here to guide you through these financial decisions. If you would like to discuss any of the subject matter highlighted within this article, please feel free to contact us.