Back in the autumn, just after he moved into number 11, chancellor Jeremy Hunt announced a series of tax freezes and allowance cuts as part of his shake up of government financial policies.
The tactic of freezing allowances was carefully chosen. Technically, it was not a tax increase – but in inflationary times, when money is worth less and wages rising more people will be pushed into a higher tax bracket – otherwise known as fiscal drag. It has the effect of causing us to pay more to HMRC.
And there are some changes to tax bands. Personal allowance remains at £12,570. The 45% rate on income tax for the tax year 2023/24 will be applied to anything over £125,140 from the previous £150,000. Together with the fiscal drag, almost 1.5 million more people may be dragged into higher tax bands by 2027.
As well as these changes, in tax year 2023/2024 capital gains tax allowance will be cut from £12,300 to £6,000, and the dividend allowance will fall from £2,000 to £1,000 and then to £500 from 6 April 2024.
It looks as though it is time to look at ways of making the most of what tax allowances remain. At Continuum we have some suggestions.
1. Use up your Capital Gains Tax allowance before you lose it
Currently, you can make gains of up to £12,300 on investments before you are liable for Capital Gains Tax.
This tax allowance will be cut by over 50% as soon as the new tax year begins on April 6th, meaning you will only be able to make gains of £6,000 before you have to pay tax on them.
You could of course make full use of this year’s allowance, and cash in some gains before the April deadline, so you don’t have to pay tax on them in the future.
2. Make the most of your ISA
ISAs are the foundation of investment for most taxpayers because all income and capital gains they generate are tax free. This means your money can grow faster, because the taxman is not creaming off a share, and when you do come to cash in there are no worries about a hefty tax bill.
Under current rules, you can put up to £20,000 per tax year in an ISA either in cash or investments – couples can save up to £40,000. But it really is a case of use it or lose it. Once the April 5 deadline has passed, you cannot take it with you into the new year. Don’t leave opening or topping up your ISA to the last minute. Providers might need time to process applications or add funds.
3. Bed and ISA
If you have investments outside an ISA, you might find that the new tax rules will affect them. If you have not already used up your allowance you may be able to give them ISA protection, with a Bed and ISA transfer. A Bed and ISA transfer involves selling an investment held outside an ISA, then moving the funds into the ISA and using those funds to buy the same investment back.
Future dividends and gains are protected from the taxman. Again, it is worth acting while there are at least a few weeks before the tax year-end to make sure it goes through in time – and that Bed & Isa is treated as a sale for CGT purposes. Any gains that exceed the current annual CGT allowance of £12,300 will be liable to tax.
4. Transfer assets to your spouse
Do you or your spouse pay tax in different bands? If a couple shares assets, they can both take full advantage of their allowances to save on tax. Transferring assets to your spouse or civil partner can be done without a tax bill, provided you are not separated. Only married couples and civil partners can transfer assets tax-free, and once you transfer shares, funds, or cash, your partner will become the full legal owner.
Make sure you use up your allowances in the run-up to the end of the tax year.
5. Boost your pension
The annual allowance places an annual limit on the total amount of tax efficient pension contributions you can make in a tax year. This limit is £40,000 or the amount of your income, whichever is the lower. Pensions can be an excellent investment, thanks to tax concessions and long term compound interest, so putting a lump sum into your pension before tax year end could be a wise move.
6. Consider a salary sacrifice
If you are getting close to £100,000 of income you start to lose your tax-free personal allowance, at a rate of £1 for every £2 you earn over the threshold. This means an effective tax rate of 60% – you might also find that you fall into paying more tax than you would like if you are close to the limit for basic rate tax.
If you want to reduce your amount of taxable income you could opt for a salary sacrifice scheme. This is an arrangement that allows employers to reduce employees’ salary and pay the equivalent amount into a non-cash benefit such as pension contributions – so the taxman misses out. Consideration will need to be given to the effect of salary sacrifice on certain benefit entitlements and the amount you may wish to borrow.
7. Get some expert help
Tax is complicated, and if you want to make sure you pay no more than you need to you will need some expert help. A call to us at Continuum could help you find the expert help you need.
But remember, the tax year is running out. Contact us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable tax or investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
A pension is a long-term investment. The fund value may fluctuate and can go down, will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate taxation advice.
