If you’re looking to give your finances a check-up, an important step is to make sure you’ve made the most of your annual tax-free allowances. You can’t carry most of these over to next year, so you’ll lose their benefits if you don’t take full advantage before 5 April.
This checklist will give you an idea of what to look out for so you can see if you’ve used the allowances available to you and your family.
ISAs
Individual Savings Accounts (ISAs) are a great way to save and invest in a tax-efficient way, and this year’s annual allowance is £20,000. The main advantage of ISAs is that you don’t have to pay any income tax on interest from cash savings, dividends from shares or coupons from bonds.
If you have an investment ISA, there’s no capital gains tax (CGT) to pay on withdrawals or when you make changes to the underlying holdings. In addition, your savings and investments can remain in the ISA tax wrapper when transferring between different types of accounts (such as a cash ISA to an investment ISA) or switching providers.
ISAs are an important source of tax-efficient savings for many people, including those who have retired. The ISA allowance for the next tax year will remain at £20,000. The earlier you can save or invest, the longer your money will have to grow.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.
You can also save up to £9,000 a year for each child and grandchild under the age of 18 in a Junior ISA (which does not count towards your own allowance). In the event of your death, your surviving spouse or civil partner can usually inherit the equivalent tax-free value of your ISAs.
Pensions
A pension fund is almost always the most tax-efficient way to save for retirement. They come with complex rules, however – especially if you’re a high earner.
Depending on your total annual income, you may be able to contribute up to £60,000 to your pension this year, and possibly roll over any unused allowances from the past three years. Your spouse or partner can also use their £60,000 allowance where available, and you can put £3,600 into junior pensions for children and grandchildren.
The lifetime allowance has been abolished, so there’s now no limit on how much you can save in total. So if your income is likely to fall next tax year (for example, you’re retiring or taking a career break) then it’s important to find out whether making additional contributions this year is a good idea.
Once you reach the age of 55 you can withdraw 25% of the value of your fund tax-free (subject to a maximum amount). In addition, your named pension beneficiaries are usually able to inherit your pension free from inheritance tax.
If you’re planning to make a large pension withdrawal in the next couple of years and want to know about the tax consequences then it’s a good idea to discuss the potential implications with your Specialist Financial Adviser.
Capital gains
Capital gains tax (CGT) and the associated exemptions and thresholds can make a difference to your finances. CGT affects assets and property differently when it comes to how much you’ll pay, and the rules often change. It’s a good idea to speak to your specialist financial adviser for more information.
At the moment, the penalty for withdrawing investments that are not in a tax wrapper (like an ISA) is 10% on gains for basic rate taxpayers and 20% for higher and additional rate taxpayers (not including the additional 8% levy for investment property).
The CGT annual exempt amount is falling from £6,000 in 2023/24 to just £3,000 in 2024/25. The same exemptions will apply to your spouse or partner’s annual CGT allowance.
As well as using your ISA allowance each tax year, think about your CGT exemption, particularly if you have large unrealised capital gains in an investment portfolio. You can transfer assets to your spouse or civil partner tax efficiently to ensure you’re using both exemptions.
Inheritance
One of the best things you can do to ensure you don’t leave your loved ones with an unnecessary inheritance tax (IHT) bill after you die is to plan ahead and take advantage of the reliefs available sooner than later.
For example, you could use your annual gift allowance to give away £3,000 to one person or split it between several people – and you may be able to carry any unused amount forward to the next tax year. Or you could give a tax-exempt wedding gift of £5,000 to your children or £2,500 to any grandchildren or great grandchildren where appropriate.
Additionally, you can gift up to £250 to those who haven’t received gifts under any of the other allowances. These and other gift exemptions can reduce the value of your estate for IHT purposes.
Remember that any money or assets you give away over these allowances are likely to be liable to IHT if you die within the next seven years. Beyond using your annual gift allowances, there are many other ways to structure and organise your assets so you can pass them on tax efficiently.
Please note that the Financial Conduct Authority does not regulate inheritance tax planning or trusts.
Charity
Donating to charity is a great way to support the causes you care about – and you can claim back the tax on any donation through gift aid. If you’re a higher or additional income taxpayer, you can also claim back the difference to the basic rate on your gift aid donations. Remember to hang on to records of your donations to claim tax relief when the time comes to submit your tax return.
The information in this article is based on current understanding of taxation and legislation, which may change.
We’ve covered some of the ways to make your personal finances tax efficient and there are others. Please speak to a Specialist Financial Adviser from Wesleyan Financial Services to find out which allowances are best for you and your family. We’ll also be able to help you navigate some of the more complex rules, so you don’t make the wrong decisions.