4 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. It’s particularly critical to note that some allowances have diminished in the current tax year with further reductions slated for 2024/25.
Conversely, notable adjustments have been made to pension allowances, and in this article, we’ll delve into the implications of these in the context of financial planning.
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 current tax year, and is set to decrease further to £3,000 in 2024/25. This reduction means a diminished 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 is available, it could be useful to sell some assets in the current year to deal with the lower allowance in the new tax year, as unused allowance cannot be carried forward.
The dividend allowance is also reducing in the new tax year from £1,000 to £500, so any dividend income is more likely to attract income tax in the new tax year. This is relevant for 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.
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 between £50,000 and £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.
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.
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.
Stuart Hutton
Financial Planning Consultant