Are you ready for the end of the tax year on 5th April?
Are you ready for the end of the tax year on 5th April? In the midst of some of the biggest pension changes in nearly 10 years, a freeze on most tax bands, along with ongoing cuts to capital gains tax (CGT) and dividend allowances, there is much to plan for.
To help you get prepared, we’ve put together a checklist of 10 tax year end planning tips to consider.
We recommend that you should always speak to a financial adviser to ensure that any actions are appropriate for your circumstances.
1. Use your ISA allowance
Currently, you can pay up to £20,000 to your individual savings account (ISA) per tax year. It’s an efficient way to save as any income, whether dividends or interest, is tax free, and so are the capital gains. Could you invest in a cash ISA or a stocks and shares ISA, or add to your existing investments?
Younger people (those aged 18-40) and first-time buyers could also benefit from saving into a lifetime ISA. Subject to certain conditions, the Government pays an additional 25% up to an allowance of £4,000 in this tax year (which forms part of the overall £20,000 allowance).
It’s also worth remembering that many ISAs are ‘flexible’ nowadays, which means that any money withdrawn in the current tax year can be replaced before 5 April, on top of the £20,000 allowance. But each ISA provider is different, so it is important to know their rules before making additional payments.
2. Pay into your pension
We all know the importance of saving for the future, but did you know that investing into your pension is one of the most tax-efficient forms of saving? Not only is there the potential to receive tax relief on your contributions up to the highest level of income tax you pay, but you also benefit from tax-free growth on investments within the pension itself.
What’s more, contributing into a pension could move you into a lower income tax bracket, reinstate your personal allowance (see our tip no.8) or help you keep more child benefit payments.
In the current tax year, up to 100% of an individual’s UK earnings can be contributed to a pension to receive tax relief, subject to the annual allowance of £60,000. Any unused allowance from the previous three tax years can also potentially be ‘carried forward’ to increase the amount you can save.
If you’re a business owner, taking profits as pension contributions could also be a highly tax-efficient way of boosting your retirement savings whilst reducing your overall tax bill. By making an employer pension contribution, both income tax and National Insurance can potentially be saved. On top of this, pension contributions from a business are usually an allowable expense for corporation tax.
However, pensions can be complicated. There are important considerations for those who have drawn income from their pension and those whose income exceeds £260,000.
3. Consider your capital gains
With the annual exempt amount for capital gains tax (CGT) reducing further to just £3,000 in 2024/25, capital gains planning is becoming more important than ever.
Before 5 April, CGT may be payable on gains realised above a higher exempt amount of £6,000. There are still a few weeks to check the position of your investments and potentially realise gains while the exempt amount is at a higher level.
Equally, you may be able to realise a loss that can be carried forward indefinitely and reduce gains in future years when the exempt amount is lower.
4. Review your lifetime allowance position
After the announcement in 2023, the lifetime allowance is at last removed in April. However, it lives on in new allowances: one capping the tax-free cash you can receive, and one that limits tax-free pension funds when somebody dies.
With the lifetime allowance on the way out, it is important for those with higher levels of pension savings to consider what its removal and the introduction of the new allowances means for them.
Among other considerations, it may be possible for someone who had previously stopped saving into their pension (to protect a higher lifetime allowance) to restart their contributions, or otherwise claim a lifetime allowance protection to secure a higher entitlement to tax-free cash.
Equally, if you have previously taken income from one or more pensions, you should check how much tax-free cash was taken and how this will be converted into the new post-lifetime allowance regime. Under the default arrangement, some people may lose out on some tax-free cash entitlement and a review is worthwhile.
5. Think sustainably
If you’re reviewing your finances, it’s a good opportunity to consider investing sustainably. This can bring tremendous benefits: for example, according to Make My Money Matter, investing your pension sustainably is 21× more effective at cutting your carbon emissions than giving up flying, becoming vegetarian and switching energy provider. 1
At Holden & Partners, we’re experts in advising people on sustainable investments and why they make sense; not just for the planet, but for your pocket too. We offer a variety of sustainable options for you to consider.
6. Consider gifting
If you’d like to give money to loved ones and see them enjoy the benefit of your gift, it is possible to do so while also reducing future inheritance tax (IHT).
You can gift a total of £3,000 each tax year (to one person or split between several) without affecting the value of your estate.
For more info on the intricacies of gifting, look here.
Equally, if you can, there has rarely been a better time to donate to charity. The cost-of-living crisis has profoundly impacted charities, increasing demand for their help whilst making it harder to fundraise. 2
Many people are familiar with Gift Aid, but another effective way to give to charity is to transfer investments or property. The value of the donation is deducted from taxable income, exempt from CGT and exempt from IHT – all while enabling you to support a cause close to your heart.
7. Check if you qualify for marriage allowance
If you’re in need of a Valentine’s Day surprise, perhaps consider the gift of tax savings! This little-known benefit for couples enables the lower earner to transfer £1,260 of their personal allowance to their wife, husband or civil partner, reducing their tax by up to £252. To benefit as a couple, the lower earner must have an income under the personal allowance of £12,570. 3
You can calculate any potential tax savings here.
8. Reclaim your income tax personal allowance
Those earning between £100,000 and £125,140 suffer an effective tax charge of 60% on this slice of income as their income tax personal allowance is removed. Making pension contributions or gifting to charity can help to reclaim the personal allowance, lowering the overall tax paid.
9. Save for your children
Children can benefit from tax-efficient saving too. The junior ISA allowance is £9,000 per child under the age of 18. 4 Although access to the funds is given up, the parent keeps control over how it is invested. Once the child reaches age 18, the account becomes an adult ISA and is the child’s property outright.
You could also consider investing for your child or grandchild’s retirement by setting up and making regular contributions to a pension.
10. Further options
Once other allowances are used, additional investment options such as venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) might become appropriate. These schemes are higher risk but offer tax incentives to encourage investment into smaller UK companies. On top of income relief of 30% (50% for SEIS), VCTs benefit from tax-free dividends, while EISs can be used to defer a CGT liability and may qualify as IHT-exempt if held for two years.
These investments are generally only suitable for certain individuals who can afford to take a high level of risk with their capital and are seeking to invest for at least five years, but ideally longer.
We’re here to help with financial planning and sustainable investments. Why not get in touch for a chat?
Please note that any thresholds, allowances, percentage rates and tax legislation stated may change in the future. The content of this communication is for your general information and use only; it is not intended to address your particular requirements. This communication should not be deemed to be, or constitute, advice. You should not take any action without having spoken with your usual adviser.
1 https://makemymoneymatter.co.uk/21x/
3 Marriage Allowance – GOV.UK (www.gov.uk)
4 Junior Individual Savings Accounts (ISA) – GOV.UK (www.gov.uk)