Get ready: Financial housekeeping ahead of the tax year end

With the new calendar year underway, the tax year-end on 5 April is rapidly approaching. Now is a crucial time to maximise all available allowances, ensuring your wealth is structured as tax-efficiently as possible. By doing so, you can achieve greater financial flexibility in the long term.

To get your tax year-end house in order, here are Crowe Financial Planning’s top pointers.

1. Individual Savings Account (ISA)

Tax free growth and tax-free withdrawals, make ISAs one of the more attractive investment wrappers available. The current annual allowance for an ISA is £20,000 (2024/2025 tax year). For those who have a flexible ISA arrangement, it may be slightly higher as you can also offset some charges.

The key point here is if you don’t use this allowance, you lose it, and the full amount will be reset to £20,000 the next tax year but you cannot carry forward any part of this unused allowance.

For first time house buyers, there is also the Lifetime Individual Savings Account (LISA) which you can contribute up to £4,000 each tax year with the government topping each contribution up by 25% which is an attractive £1,000 if you use the full allowance.

It is important to note the £4,000 forms part of your overarching £20,000 ISA allowance, where for example if you contribute the full £4,000 to a LISA, you will only have £16,000 of your ISA allowance remaining.

LISAs are available to be open by individuals between the ages of 18 and 40 regardless of whether you are a first-time buyer or not but if you do not use them to purchase your first home or are already a homeowner you cannot access the wrapper until age 60 without suffering a 25% charge and can only contribute into it until age 50. A further caveat is a LISA needs to be open for a minimum of twelve months before being used for a first-time house purchase up to the value of £450,000 in tandem with a mortgage.

While this may seem a convoluted way to structure your ISA allowance, obtaining a 25% risk free return on £4,000 before any investment growth is an attractive return and could be used as an additional retirement pot.

For the younger generation, Junior Individual Savings Account (JISA) have an annual allowance of £9,000 each tax year and benefit from the same tax efficiencies as an adult ISA. Making contributions to a child/grandchild’s Junior ISA also has the potential to remove capital from your estate for Inheritance Tax purposes and start providing strong financial foundations for the next generation.

2. Pensions

Contributions into a pension benefit from tax relief at your marginal rate. If you are a higher rate or additional rate taxpayer, depending on the method in which contributions are made, you may have to reclaim the tax relief above the basic rate via self-assessment.

The amount you can contribute to a pension tax efficiently relies upon a number of factors.

Firstly, there is the annual allowance which for this tax year is the lesser of £60,000 or 100% of your pensionable earnings, including any employer pension contributions. However, if you have already drawn an income from a pension or earn over £200,000, your annual allowance may be reduced to a minimum of £10,000.

Secondly, if your annual allowance is greater than your earned income, there is a limit on personal tax relief which is the greater of 100% of your pensionable earnings or £3,600. This includes personal / employee and third-party pension contributions but not pension contributions made by your employer. If you have no earnings, the maximum you can contribute is £3,600 gross and if you are considering making a personal contribution, remember that it will benefit from tax relief which will form part of your allowance.

Finally, there is also the ability to utilise any unused annual allowance in the previous 3 years, but you always have to deplete the current tax years allowance first and of course have the pensionable earnings to offset this level of contribution.

If you do not have a large chunk of capital to invest, you could consider reviewing your auto enrolment contribution amounts as small incremental increases can make a big difference over the longer term. Do not compromise your affordability regarding this and if unsure always speak to a Crowe Financial Planning consultant in the first instance as there are many complexities around pensions, especially the allowance which, if misinterpreted could give rise to a tax charge.

3. Capital Gains Tax

Capital Gains Tax (CGT) occurs when you sell an asset for profit. This could be on a taxable investment, chattels (worth £6,000 or more, excluding cars), holiday home and so on but the gain between the value from when you acquired the asset to when you sell it is taxable at your marginal CGT rate.

The CGT allowance is a negligible £3,000 for the 2024/2025 tax year and the tax rates for CGT are 18% for gains (or parts of gains) falling within the basic rate band when added on top of income and 24% for any gains falling above the basic rate band on the bulk of assets.

Taxation becomes somewhat more complex for chattels. The gain may push you into a higher rate tax bracket, so it is important to take note of your total income when factoring in the potential tax on a gain.

There are solutions available to potentially help mitigate a CGT liability and you can contact us for more information around this.

4. Personal allowance

Your personal allowance of £12,570, is the amount of income you can earn tax free. If you are married and one of you is a non-taxpayer and the other pays tax at no more than the basic rate, the non-taxpayer can give £1,260 of their personal allowance to their spouse to use to offset a portion of tax paid.

Further to this, for every £2 you earn over £100,000, you lose £1 of your personal allowance. If you are earning at a level where you are losing your personal allowance, a pension contribution may be able to help you reclaim some of, if not all your allowance.

This can be a complex area and again it would be best to speak to a Crowe Financial Planning consultant in the first instance.

5. Gifting allowance

With frozen allowances and increases in property values, more estates are being hit with Inheritance Tax than ever before.

You have an annual allowance of £3,000 which you can gift out of your estate each year. If you haven’t used the previous year’s allowance, you can carry it forward one year, increasing your available allowance for that specific year to a cumulative £6,000. This is another ‘use it or lose it’ allowance.

This has the benefit of getting some wealth outside of your estate immediately without tax implications. Larger gifts above this amount typically take up to seven years to fall outside of your estate so this is a ‘quick win’ in comparison.

There are wider solutions to the growing inheritance tax concerns and if this is something you would like to explore further do not hesitate to contact us.

Conclusion

Over the next twelve weeks, you have the opportunity to take stock of your situation and make use of allowances suitable for you. We would always suggest seeking professional advice as this is not one size fits all and allowances which suit others may not be appropriate for you. One thing is certain, we have a finite amount of time to make a difference to your financial plan so do contact us today.