Senior Adviser, Janine Simpson, outlines 6 tax planning tips for you to consider looking ahead to the tax year-end, this coming April.
Tax Year-End Allowances and Reliefs – Use them or lose them!
As we approach another tax year-end, I want to share some of the annual opportunities we have available to us in terms of tax reliefs and allowances. Many of our clients are already making use of these annual allowances which can give us tax-free growth and often tax-free savings in retirement – and the bigger that pot becomes the better.
In an ideal world we would be looking to use all of these but that is not always affordable. However, in most cases, you can benefit from paying less tax, so why not use some rather than none!
Having a discussion with your adviser at your annual review or prior to the tax year-end is key to your financial future. Below are 6 tax planning tips for you to consider:
1. Pension Contributions
To make the most of your allowances and tax relief before the end of the 2023/24 tax year, you might consider making a one-off pension contribution.
The government gives tax incentives to us if we pay personal contributions into pension plans, this is known as tax relief, to encourage people to save more. Pensions are one of the most tax-efficient ways to save for your future, so you might consider making a one-off pension contribution or increasing your regular contributions if your budget allows. You can do this at any time, but the end of a tax year may be a good opportunity to take advantage of pension’s tax benefits.
Currently the annual pension allowance of up to £60,000, subject to our earnings being at this level. If our earnings are less than this, we can pay in a contribution, up to our earnings in that tax year. Even in retirement, we have an annual allowance of up to £10,000 pa.
Why consider this? In simple terms a pension is the most tax efficient wrapper, it grows tax free, and it is not in our estate for IHT purposes.
2. ISA Allowance
Once we have used our annual pension allowance, we should consider funding all or some of our ISA allowance.
We each have an allowance of £20,000 per tax year, and this also grows tax free and is not subject to tax on withdrawal.
ISA’s can be accessed in retirement to supplement pension income which helps reduce the overall tax on your total income. They are also flexible, and you can take lump sums. If you are looking to take out a stocks and shares ISA, it is sensible for this to be over a 5-year time horizon.
3. Use your Capital Gains Allowance.
We should consider moving taxable assets to non-taxable. An example of taxable assets are shares or direct investments, and this means moving them to a tax-free environment.
If you have investments held outside tax wrappers, you should strongly consider using your annual capital gains tax (CGT) annual allowance by April 5th.
The CGT allowance halved from £12,000 to £6,000 in 2023-2024 tax year and will half again to £3,000 from April 6th.
Realising any gains above this figure could be subject to heavy tax bills.
4. Immediate relief from IHT
Inheritance tax is also known as a voluntary tax, this is because there are ways we can reduce or avoid this with careful financial planning.
The nil rate band – the part we are not taxed on – has stayed at £325,000 for over a decade, this means that more tax is being paid each year.
Did you know that you can give what you like from your income? There is no need to keep track of this in the way we do with larger gifts.
In most cases when you make gifts to save IHT, you must survive 7 years before the asset/money is outside of your estate.
This is a complicated area and is worth discussing with your adviser. It is better to plan than to give your heirs a 40% tax bill on any assets above £325,000 (£650,000 for couples). This can be increased if you have children, and it will depend on the value of your home.
5. Personal Savings Allowance
There are ways to save tax on your cash savings too. This allowance enables you to earn a certain amount of interest each year and not pay tax – it does depend on the level of your earnings.
- 20% tax is £1,000 pa.
- 40% tax is £500 pa.
- 45% tax and you don’t get this allowance, you pay tax on all your savings!
We must take this into account, especially now the interest rates are higher, and make sure you are not holding too much in cash.
6. Top up your pension to retain valuable benefits and allowances:
Scenario A: Child benefit is a valuable income source for many parents but as soon as one of you earns more than £50,000 this reduces and over £60,000, this benefit is lost.
However, there is a way we can get this back, by paying extra into our pensions.
Scenario B: If your income is above £100,000 a year your personal income tax allowances are reduced, and this disappears once your income hits £125,140. Again, paying into a pension can help you retain some or all this allowance, £12,570 current tax year.
It both scenarios happen the combination of 40% tax and lost child benefit is in effect 60% on this portion of your income!
How can a pension help you here? In both scenarios paying into a pension reduces your “adjusted net income”. You can get both tax relief at your marginal rate, and retain the above-mentioned valuable allowances and benefits.
For example, if you earn £57,000 and pay a net £5,600 contribution to your pension (grossed up this is £7,000 due to 20% tax relief at source), your adjusted income for the year becomes £50,000! And by magic you retain the child benefit allowance.
The main benefits to take away from the above:
- You swerve the high-income child benefit charge.
- You claim back the extra £1,346 on your tax return.
- You are boosting your future retirement pot.
Your adviser will be able to discuss this with you in detail, and help you decide the best options for your personal circumstances.
There are a lot of other angles that can also be explored and explained by your adviser. After all it is better to build a bigger pot for your retirement and save tax along the way. These allowances and reliefs are gifts, and it is better to use them than lose them!
Tax year end deadlines for contributions
Don’t leave it too late. The tax year ends on April 5th, however, Providers do become very busy around this time, there are lots of clients already considering and taking action on many of these allowances, which results in queues to process this type of business.
Please contact your adviser to arrange a suitable date and time for a telephone or face to face appointment in February or early March.
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