February 10, 2024
If you haven’t evaluated your personal tax situation recently, there is still time to do it before the tax year ends on 5th April.
Understanding your tax affairs is key to maximising your wealth and setting you up for a secure financial future. It might sound obvious but the less you pay in tax, the more there is to help you achieve your goals. Paying more tax than is necessary, is like filling up a leaky bucket and watching your savings drip out of the holes!
Your IFA can offer advice on tax planning, highlighting potential reliefs or allowances which could lead to significant financial benefits for you, like:
This allowance provides an opportunity for couples where one partner is a basic rate taxpayer and the other partner’s income falls below the Personal Allowance of £12,570. The lower-income spouse or civil partner, can transfer up to £1,260 to their higher-income partner. This transfer can result in a saving of up to £252 in the 2023/24 tax year. It’s important to note that this allowance is specifically designed for married couples and registered civil partnerships.
If you are employed, there are several tax reliefs you may be eligible to claim, designed to offer financial respite for certain expenses related to your job.
One of these is for professional subscriptions. If you need to maintain membership in a professional body as part of your job, you can claim tax relief on these fees.
Another is the ‘working from home’ allowance. This is aimed at employees who incur additional costs due to working from home, such as maintaining a home office.
You may also be entitled to claim relief for business miles travelled in your personal vehicle. If you use your own car for work-related travel, this relief can offer significant savings.
These allowances are aimed at individuals who earn small amounts of income from activities like selling items on eBay or Amazon, or renting out spaces on Airbnb. Each of these allowances offers up to £1,000 of tax-free income.
Also, if you rent out a portion of your home, you may be eligible for the Rent-a-Room relief. This relief allows you to receive up to £7,500 tax-free from letting out a room in your home.
In the current tax year, you can pay up to £20,000 into one or more ISAs. We’ve written an entire article on this subject which you can read here [URL needed].
The return derived from an ISA is not subject to income tax or capital gains tax so it can be a highly tax-efficient way of saving for your future.
If you have investments outside of an ISA, you may be able to sell them, pay the proceeds into an ISA and then buy them back again. Your future dividends will no longer be taxed and it could be a way to use the annual exempt amount for capital gains tax (CGT). See more below.
Children have a Junior ISA allowance of £9,000 per annum. A parent or guardian can open a JISA to help build up a tax-efficient nest egg for when the child turns 18. A grandparent can help to fund the account but it must be managed by the parent or guardian.
A Lifetime ISA or LISA is for individuals aged 18 to 40 who are either planning to purchase their first home or preparing for retirement. This gives you the ability to invest up to £4,000 annually, and the government bolsters your efforts with a 25% bonus, up to a maximum of £1,000 per year. This money can be used to buy a new property (subject to certain restrictions) or accessed when you turn 60 to supplement your retirement income.
Pension contributions should be a key consideration at the end of each tax year. Did you know you can also make contributions to pension schemes on behalf of your minor and adult children and your grandchildren?
There are several advantages to putting money into a pension, quite apart from establishing a fund that you can live off in retirement. From a tax perspective, the key benefit is that a pension scheme can reclaim basic rate tax from HM Revenue & Customs (HMRC). You can receive additional tax relief if you’re subject to the higher or additional rates.
Contribution limits were raised for the current tax year of 2023/24, meaning the annual allowance is now the lesser of your earned income or £60,000 gross (ie, including the tax relief).
All UK residents under the age of 75 can contribute up to £3,600 gross (£2,880 net) per year, irrespective of income level. However if your total taxable income plus employer pension contributions exceeds £260,000, your allowance will be ‘tapered’ by £1 for every £2 of income over this threshold.
This can be a complex area to understand so an IFA can advise you on the most suitable course of action for your specific circumstances.
Unlike most annual allowances, it is possible to ‘carry forward’ unused pension allowances from the previous three tax years if eligible. At the end of this tax year, you will lose any unused allowance for the 2020/21 tax year. If you’re uncertain as to whether you have unused allowances, an IFA can help you get a clear picture and recommend an appropriate course of action.
Capital gains tax (CGT) can be quite complex so it is important to speak to an IFA or accountant who understands your specific circumstances. For the tax year 2023/24 the annual exempt amount is £6,000 and this will drop to £3,000 for 2024/25.
If you own shares that pay dividends, the first £1,000 per year is currently tax-free. The dividend allowance is set to reduce to £500 per annum in the 2024/25 tax year.
Many people are familiar with the ‘7 year’ rule for inheritance tax (IHT) but certain sums can be exempt and therefore reduce the size of your taxable estate immediately. The most well known is the annual exemption of £3,000 which can be given to a single individual or divided among several recipients. If the previous year’s exemption wasn’t utilised, it can be carried forward to the current tax year, effectively doubling the exemption to £6,000.
In addition you can give ‘small gifts’ of up to £250, provided each gift is given to a different recipient and is the only tax-exempt gift they receive from you within that tax year. In other words, you can’t give £3,250 to the same person!
A further exemption exists for wedding gifts from a parent to their child up to £5,000, from grandparent to grandchild up to £2,500, or up to £1,000 for anyone else.
Understanding these exemptions and allowances can help you plan ahead and take small actions over several years which can add up to a greatly reduced IHT bill.
Your Personal Savings Allowance (PSA) refers to the amount of savings interest income/growth you can earn tax-free. Current levels are set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers, however, are not entitled to this allowance.
The tax landscape changes frequently and the reasons can be political as much as fiscal. The next few months are sure to bring lots of speculation about potential changes in the future, many of which won’t ever see the light of day.
If you’d like the help of an experienced IFA to review your tax position before the end of the current tax year, get in touch quickly!
Note: This article does not constitute tax or legal advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
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