Happy New Year
It is that time of year when tradition dictates that we make New Year Resolutions; for many of us who have overindulged this Christmas, it is not hard to come up with the usual promises to oneself. Whilst the financial New Year is not until the 6th April, it is important to start thinking ahead, as the next three months will go very quickly.
Here are the things that should be given consideration between now and the 5th April.
Maximising Annual ISA subscriptions
We each have an annual ISA allowance of £20,000 for the tax year. Cash, investments and individual stocks and shares can be ‘wrapped’ in an ISA. If you do not have cash available to fund an ISA, you should also consider the possibility of wrapping existing investments (such as General Investment Accounts or stocks and shares) allowing them to benefit from the tax efficient treatment of an ISA.
It is not just adults that have an ISA allowance; Junior ISAs, can be funded up to a maximum of £9,000 for those under the age of 18.
Free from capital gains and income tax, ISAs are an important tax free savings vehicle, but, unlike pension allowances they cannot be backdated; if you do not use it, you will lose it.
Top up your Pension
Personal Pension contributions are made net of basic rate tax; high and additional rate tax payers are able to claim back further tax on their tax return. It therefore costs a high rate tax payer £6,000 to contribute £10,000 to their pension.
The amount an individual can contribute to a pension in the current tax year is the lesser of their earned income or £60,000 (previously £40,000 per tax year). For some it is also possible to back fill any unused allowances from the previous three tax years and benefit from tax relief in this tax year.
Even if you have no taxable income, you are able to make a gross annual pension contribution of £3,600 at the net cost of £2,880.
Avoid the £100k p.a 60% tax trap
Once an individual’s earnings exceed £100,000 per annum, they start to lose their Personal Allowance (the 0% income tax band). The personal allowance is £12,570 and it reduces by £1 for every £2 earned over £100,000. This means that once you earn £125,000 per annum you no longer have a personal allowance and the effective tax rate paid on £100,000-125,000 is 60%. There is a compelling case for making a pension contribution for these individuals, bringing their earning back down to below the £100,000 threshold and savings 60% tax.
Annual Gift Exemptions
It is possible to make certain gifts each tax year which are exempt from Inheritance Tax. Each individual is able to gift £3,000 per tax year and larger gifts can be made if there has been a wedding in the family.
It is possible to gift any amount, and these are known as potentially exempt gifts that are deemed to be part of the donor’s estate for the following 7 years with the IHT liability reducing on a sliding scale over the 7 years.
For further information on this please see our recent article on gifting.
Use your Capital Gains Tax Allowance
The Capital Gains Tax (CGT) allowance is the amount of capital gain that an individual can make on disposal of an asset without paying tax. The allowance was reduced this tax year to £6,000 and is due to be reduced again next tax year to £3,000. Any investment gains in excess of the annual CGT allowance are taxed at 10% basic rate and 20% high rate. If the gains are from investment property, then the respective rates are 18% and 28%.
Transfers between spouses have remained exempt and so a tax savings can be had if you transfer an asset to a husband, wife or civil partner before selling.
Any losses made in the same tax year can be offset against gains. Capital gains allowances cannot be carried forward; if not used they are lost.
Record any losses
If you have realised a capital loss this tax year, such as selling a taxable investment or property for less than you bought it for then you should record this, as it can be offset against gains within the tax year or carried forward indefinitely for use against gains in future tax years.
Lifetime Allowance Planning
For those with pension savings over the Lifetime Allowance (£1,073,100), the good news is this tax year saw the reduction of the Lifetime Allowance charge to 0% (previously 25%) and the Lifetime Allowance being abolished from 6th April 2024. This has opened up opportunities for some individuals who had ceased accumulating pension savings to start to contribute again.
Pension savers in excess of the LTA who are above the minimum pension age (55) should be considering carefully their LTA position now. This tax year represents an opportunity to crystallise excess funds (those above the LTA) without being subject to a tax charge. Whilst this should also remain the case next tax year, we will be in an election year and we do not know how, if elected, a new government may decide to change pension policy.
Lifetime Allowance planning is complex and if you are 55 or over and have already used your full LTA and have uncrystallised pension savings or have not accessed your pension savings and they exceed £1,073,100 then you should be speaking to your Wealth Manager now.
Manage your Pension withdrawals
For those in retirement and no longer saving, the tax efficiency of withdrawals should be considered before April. Individuals with no earnings, may be able to draw the full Personal Allowance £12,570 from their pension without paying any income tax. Others who know that they will need to take a large withdrawal from their pension savings over the next 12 months, may wish to spread this over 2 tax years to avoid paying any high rate tax.
Whilst the Tideway team may not be able to help you resolve to go to the gym more, eat healthy food or have less screen time, we are here to help you with your year end tax planning. To discuss any of the above please contact your Wealth Manager.
The content of this document is for information purposes only and should not be construed as financial advice.
Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
We always recommend that you seek professional regulated financial advice before investing.
- The content of this document is for information purposes only and should not be construed as financial advice.
- Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
- We always recommend that you seek professional regulated financial advice before investing.
