Tax year end housekeeping

As we enter the new calendar year, we are rapidly approaching the tax year end with only twelve weeks to go. This is a key time to ensure you are making the most of all the allowances available to you, so your wealth is being structured as tax efficiently as possible, giving you greater financial flexibility over the longer term.

To get your tax year end house in order, below are Crowe Financial Planning UK Limited (Crowe FPUK) 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 (2023/2024 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 12 months before being used for a first-time house purchase.

Whilst 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 following recent volatility 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 lower of £60,000 or 100% of your total 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 the limit on personal tax relief which is the greater of 100% of your earnings or £3,600. This includes personal/employee and third-party pension contributions but not pension contributions made by your employer.

Finally, there is the ability to utilise any unused annual allowance in the previous three years but you always have to deplete the current tax years allowance first and of course have the 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. With the national insurance rates dropping in the new year, it may be your take home pay will not wildly differ to what it currently is. Do not compromise your affordability over this and if unsure always speak to a Crowe FPUK 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 Tains 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 was reduced last tax year from £12,300 per person to £6,000 this tax year. It is scheduled to drop further in the 2024/2025 tax year to £3,000. Therefore, this is a key opportunity to make the use of a larger allowance before it decreases again in April 2024.

The tax rates for CGT are 10% for gains (or parts of gains) falling within the basic rate band when added on top of income and 20% for any gains falling above the basic rate band on the bulk of assets. These levels increase to 18% and 28% respectively if selling a second residential property which wouldn’t benefit from the main residence exemptions.

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 FPUK 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 12 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.

Webinar: Planning opportunities in a general election year  Our webinar will highlight the importance of getting your tax and financial affairs in order. Our speakers will discuss the tax efficient actions you should be taking including using your savings and ISA allowances, making the most of your annual pension allowance, sharing income amongst the family, considering family investment companies and the use of Trusts. Available on demand webinar