Taking action in the next few weeks can make a huge difference to your finances by minimising the amount of tax that you pay on your hard-earned savings and investments. But millions of people risk missing out on valuable tax breaks simply because they don’t realise the clock is ticking, or how the end of the tax year on 5 April applies to their own money. Unfortunately, most tax allowances can’t be transferred on to the next financial year if left unused.
This year increasing numbers of people face paying tax on the interest they earn on their cash savings and the profits and dividends that they get from investments. That’s because the personal tax thresholds are frozen until at least 2028, while the annual ‘exempt’ amounts for income and profits have reduced (like Capital Gains Tax and the dividend allowance).
Here are the top four actions to consider before your allowances reset at midnight on 5 April:
1. Use as much of your £20,000 ISA allowance as you can
Concentrate on using as much of the current £20,000 allowance as you can before it disappears at midnight on 5 April. Remember that your spouse has one too and your kids have £9,000 Junior ISA allowances too. A family of two adults and two children can potentially shelter £58,000 of investments from future tax on income and gains. Don’t let worries about current wobbles in the stock market put you off taking out an investment ISA. You could open one with a cash subscription to secure the allowance, and then drip feed the money into investments over the coming months when you feel more confident with investing.
2. Top up your pension to reduce your income tax bill
Putting extra money into a pension will not only help you have a more comfortable retirement, but will also reduce the amount you pay in income tax this year. If you’re a basic rate taxpayer, each contribution receives 20 per cent in tax relief while higher rate and additional rate taxpayers can claim a further 20 per cent and 25 per cent respectively off their tax bill via self-assessment.
For example, if a basic rate taxpayer contributes £1,000 into a pension, the net cost is just £800, with their pot receiving £200 in tax relief. For someone paying 40 per cent tax, the net cost of the £1,000 pension contribution is just £600. It’s a good way to keep more of your income, rather than it going to the Treasury, but it needs to be money that you can afford to lock away – you can’t access your pension until 55 (increasing to 57 in 2028).
But there are some restrictions – the maximum you can pay into a pension this tax year is 100 per cent of your income from employment and subject to a maximum of £60,000. Those on very high incomes of more than £200,000 may find their annual allowance is tapered down to as low as £10,000.
The good news is that you might be able to use unused pension allowances from the previous three tax years too, under the ‘carry forward’. That would mean you can potentially make a pension contribution of up to £200,000 before April 5.
Making extra pension contributions might also help you avoid losing child benefit or the personal allowance. Once you earn more than £60,000, your child benefit starts being taxed. While if you earn over £100,000 your personal tax-free income allowance of £12,570 is reduced. By making a pension contribution you could reduce your income to stay below these thresholds.
3. Use your capital gains tax allowance
If you are sitting on gains made in investments that are held outside an ISA or pension, for example in shares held in a general investment account, it might be worth selling some of them to use your capital gains annual exemption of £3,000. It’s even more important to think about doing that this year because higher CGT rates of 18 per cent and 24 per cent were announced in the October budget.
If you are married, consider transferring assets to your spouse, which you can do free of tax, before selling them to double your tax-free allowance.
Selling assets and rebuying them within an ISA – known as ‘Bed and ISA’ – can also help keep future gains tax free.
4. Use your gifting allowances
The forthcoming change in the rules to make unused pension pots subject to inheritance tax means many people are keen to use their annual gifting allowances or to start the seven-year clock ticking on a larger gift.
You can give away up to £3,000 every year tax free. Plus, this allowance can be carried forward for one tax year, which means you can give up to £6,000 as a lump sum. You can also give away gifts out of surplus income. Most other gifts are ‘potentially exempt transfers’ which means you must survive for at least 7 years for them to be free of inheritance tax.
Parents or grandparents looking to help their children or grandchildren could do it in an even more tax efficient way by gifting money for their family members to top up ISAs, LISAs, JISAs and pensions.
Tax treatment depends on individual circumstances and may change in the future. Investments can go down as well as up, and you may get back less than you invest. Moneybox or its associated third parties do not offer personal financial advice or make specific recommendations based on your individual circumstances. If needed, seek independent financial advice before making decisions regarding your financial goals.