How To Maximise Your Tax Allowances Before 5th April
Now is the time to understand how to maximise your tax allowances before 5th April.
At the end of the 2023/24 tax year many important allowances will reset. In our latest article we highlight which allowances could be an opportunity to make your money go further and reduce the tax you pay.
We’re always on hand to help, if you are unsure which allowances are the right fit for your personal financial plan please get in touch.
Read on for must-know tips on how to maximise your tax allowances before 5th April.
National Insurance
From 6 January 2024, the main rate of Class 1 National Insurance (NIC) was cut to 10%, so workers will get more in their first pay packets of the new year.
An employee earning £50,000 will pay £3,743.00 in National Insurance after the change, saving £748.60.
Pension opportunity: This unexpected windfall could make a difference to your retirement planning if you redirect it to your pension.
ISA Allowance
You can contribute up to £20,000 in your ISA in tax year 2023/24. Any savings added to your ISA from 6th April will go into your new 2024/25 tax allowance, as the shortfall cannot be carried over.
The savings in an Individual Savings Account (ISA) are protected from UK income tax or capital gains tax, so they are very tax efficient. There is no need to declare these savings on your self-assessment tax return.
JISA allowance
A Junior ISA (JISA) offers many of the same tax benefits as a standard ISA, and it’s a useful way to set aside wealth for a child or grandchild. The money is held on their behalf until they can access it – typically when they are 18.
In the 2023/24 tax year, you can contribute £9,000 to a JISA for each child.
Tax relief on your Workplace pension
When you pay into your pension, some of the money that would have gone to the government as tax goes towards your pension instead.
Most Workplace pension schemes operate under the Net Pay arrangement, meaning everybody gets 20% tax relief. If you are a higher-rate taxpayer, you have to make a Self-Assessment claim for the additional 20% relief on your pension contributions.
Marriage Allowance
Eligible married couples and those in civil partnerships can transfer up to £1,260 of personal allowance to their partner under the Marriage Allowance. This applies if one of you earns less than the personal allowance, so is not liable to tax, and the other partner is a basic tax payer.
You can also backdate your claim to include any tax year since 5 April 2019 that you were eligible for Marriage Allowance.
You can apply for Marriage Allowance on the HMRC website.
Child Benefit
Child Benefit is clawed back by a tax charge if the highest earning individual in the household has income of more than £50,000. It is cancelled altogether once their income exceeds £60,000. A pension contribution will reduce income and reverse the tax charge, wiping it out altogether once income falls below £50,000.
Inheritance Tax bill
Inheritance Tax (IHT) is paid by the people who inherit your estate after your death. The rate is 40% for estates worth more than £325,000.
One way of avoiding your family paying IHT on your estate is to give it away when you are still alive. However, the giver must survive for 7 years after the gift, depending on circumstances.
You can also give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
In addition, you can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
Charitable Donation
Making a charitable donation can bring about numerous benefits. Not only the emotional satisfaction, but also ensuring your money goes towards creating positive social change rather than, somewhat unfavourably, towards HMRC.
Charitable donations are generally tax free. Those made through Gift Aid entitle the charity to an extra 25p for every £1 you give. This doesn’t cost you extra, Gift Aid assumes that the money has been already been taxed at the standard rate.
Capital Gains Tax Annual Exemption
The ‘Capital Gains Tax’ (CGT) Annual Exempt amount is the amount of gains that you are allowed to make before paying tax on those profits. You may pay CGT on any profits you make when selling or disposing of certain assets such as stocks and shares outside an ISA, or a property that isn’t your main home.
The Annual Exempt amount is £6,000 for individuals for the 2023/2024 tax year.
If you are looking to supplement your income tax efficiently, you could withdraw funds from an investment portfolio and keep the gains within your annual exemption.
Even if cash isn’t needed, you could take profits within the £6,000 CGT allowance and re-invest the proceeds, possibly via an ISA. This means there will be less tax to pay when you eventually need to access these funds to meet spending plans.
Fortunately, by using your full Annual Exempt amount, you may be able to reduce the CGT that you pay. Additionally, you and your spouse or civil partner each have your own Annual Exempt amount and you can transfer assets between you without incurring CGT.
By considering how you use both Annual Exempt amounts and potentially spreading the disposal of assets across multiple tax years, you might be able to mitigate a large CGT bill.
This could be especially important as the CGT Annual Exempt Amount is set to halve to £3,000 on 6 April 2024.
Personal Pension Tax Relief
Tax relief is one of the main advantages to using a pension to save for your retirement. The government will add basic rate (currently 20%) tax relief when you contribute into a personal pension up to £60,000, the current annual allowance.
For instance, to contribute £10,000, you put £8,000 into your pension and the government adds £2,000. You qualify for basic rate tax relief if you’re a UK tax payer under 75.
If you are a higher rate or additional taxpayer, you could get extra tax relief on top of the basic rate amount. Higher rate taxpayers (paying 40% tax) can claim up to a further 20% through their tax return. Additional taxpayers (paying 45% tax) can claim up to a further 25% through their tax return.
The ‘Carry Forward’ rule can also let you take advantage of any unused allowance from the three previous tax years.
Personal Allowance
Pension contributions reduce an individual’s taxable income. In turn, this can have a positive effect on the personal allowance for higher earners, resulting in a lower tax bill. An individual pension contribution that reduces income to below £100,000 will restore your full tax-free personal allowance. The effective rate of tax relief on the contribution could be as much as 60%.
Business Owners
If you’re a director of a business, taking significant profits as employer pension contributions could be an efficient way of paying yourself and cutting your overall tax bill.
The tax and NI savings can go into the director’s pension fund and the company can also benefit from corporation tax relief.
Bonus Sacrifice
Another option is to ‘exchange’ a bonus for an additional employer pension contribution before the tax year end. The employer and employee National Insurance savings made could be used to boost pension funding. This would give more in the pension pot for every £1 lost from take-home pay.
Family Wealth
You can also pay up to £3,600 into the Personal Pension Plan of a non-tax payer such as a non-working spouse or a child under the age of 18.
As with your own pension, you would be entitled to pension tax relief on any contributions made. This means you would only need to contribute £2,880 of your own money to reach the £3,600 annual limit, as the government would add the extra £720.
Special Investments & Tax Incentives
Business owners have long benefited from Inheritance Tax (IHT) savings and now private investors can too with ‘Business Property Relief’ (BPR). This is one of several tax incentives available to support investment into small UK companies.
Unlike gifts and Trust arrangements which usually only achieve IHT savings after 7 years, a BPR investment is effective after just 2 years.
Investments that qualify for BPR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.
For those with investment experience and appetite for risk, Venture Capital Trust (VCT) and Enterprise Initiative Schemes (EIS) can also bring significant tax benefits.
Tax Allowances – What’s right for you?
These tips are here to give you practical insights into maximising just some of the tax allowances available. There are many more tax allowances that could be beneficial to your own personal financial plans.
To find out more about reducing the tax you pay speak to a member of our team about a free, no obligation meeting with an adviser.
Contact us: 01244 347583, email: info@innesreid.co.uk or enter your details in the form below and a member of our team will respond promptly.
How To Maximise Tax Allowances Before 5th April: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change. The value of your investments can go down as well as up and you may not get back the full amount you invested.
