As the end of the tax year approaches, the next few weeks offer the final opportunity to use your annual allowances. Peter Webb, our Head of Tax Advisory, shares a checklist of some of the tax breaks which it makes sense to use to help make your finances work a little harder.
After 5 April 2023 many of the annual allowances available to UK taxpayers will reset, so now is a good time to make use of them. Allowances can help reduce your tax liability, particularly in the light of recent announcements by Jeremy Hunt, the UK Chancellor, which will see dividend and capital gains allowances reduce, and others frozen, from 2023.
To follow is a checklist of some of the allowances which you should try and use before the tax year ends.
- ISA allowance
- Pension annual allowance
- Venture Capital Trusts
- Dividend allowance
- Capital Gains Tax
- Inheritance Tax
1. ISA annual allowance (£20,000)
An ISA is a tax-efficient way to save and invest, free of both Income and Capital Gains Tax. When combined with Business Relief assets, ISAs can also be free of Inheritance Tax. For the current tax year, each adult can add up to £20,000 to an ISA, whilst children can invest up to £9,000 in a Junior ISA. We would strongly encourage you to use your ISA allowance if possible.
2. Pension annual allowance (up to £160,000)
A pension is an extremely tax-efficient way to save for your retirement, and using your annual allowance could help create financial security in later years. If you pay higher rate tax, an investment of £20,000 in a pension should benefit from £5,000 of tax relief added to the plan (creating £25,000 invested on your behalf*) and a £5,000 reduction in your tax bill.
Your pension annual allowance is the maximum that you can invest into your pension each tax year whilst still benefiting from tax relief. This includes any pension contributions made by your employer and basic rate tax relief. In 2022/23 the annual allowance is 100% of your earnings up to a maximum of £40,000. However, unused allowance can be carried forward up to three years – so you may be able to invest more, even up to £160,000 if you have three previous years of unused allowance and the income to support it.
Pension annual allowance rules are complicated and impacted by the level of your earnings and whether you have pensions being paid. There can also be issues with the lifetime pension allowance which need to be considered before you invest, so do take advice before starting or increasing any contributions.
*In some cases, fees might lead to a slightly lower invested amount.
3. Venture Capital Trusts (£200,000)
If you’ve made use of your pension allowances, it might be worthwhile considering Venture Capital Trust (VCT) investments. These target smaller companies and offer Income Tax relief at a rate of 30% together with freedom from dividend and Capital Gains Tax on income and profits. There is a minimum five-year holding period otherwise any tax benefits must be repaid. VCT investments are high risk and can be illiquid, so won’t be suitable for all; advice should be taken before investing.
4. Dividend annual allowance (£2,000)
If you have control over dividend payments from your company, the dividend allowance means you can pay yourself up to £2,000 in dividends without paying any tax. If you don’t use this allowance before the end of the year you will lose it.
5. Capital Gains Tax annual exemption (£12,300)
Capital Gains Tax (CGT) is paid when you sell certain assets such as shares, funds or property and make a profit. Your allowance allows you to make profits of up to £12,300 before CGT is due. Disposing of assets to utilise this CGT exemption can save you tax. You may also want to plan with your partner to maximise both of your annual exempt amounts.
Remember that after the current tax year, both the Capital Gains Tax exemption and dividend allowances will be reduced.
6. Inheritance Tax annual exemption (£3,000)
If your Estate may be liable for Inheritance Tax, the annual exemption means you can pass on a gift tax free. In 2022/23 this amount is £3,000, and it can be carried forward one year.
Planning your finances tax-efficiently and using all of your allowances can offer you some useful advantages. To discuss your personal situation please contact your Adviser or nearest office.