As we approach the tax year end, we've created this guide to highlight some of the key tax planning considerations prior to the end of this tax year, on 5th April 2024.
Pensions
The annual allowance is the limit on the total tax-relievable pension contributions. Personal contributions are limited to £3,600 gross, or 100% of ‘earned income’, up to a maximum of £60,000 gross.
Pensions are highly tax-efficient and personal contributions benefit from income tax relief and are made net of basic rate tax at 20%. Higher and additional rate taxpayers can claim further tax-relief of 20% and 25% through self-assessment. Pension funds also grow free from income and capital gains taxes, and 25% of the pension can be drawn tax-free.
With no earnings it is possible to pay up to £3,600 into a pension each tax year, benefiting from 20% tax-relief equal to £720 for a £3,600 contribution. This can also be arranged for children, which may be an attractive long-term planning consideration for parents and grandparents.
The Money Purchase Annual Allowance (MPAA) applies for those who have drawn pension benefits under certain arrangements. This MPAA is currently set at £10,000.
The Lifetime Allowance (LTA) is still set to be abolished from 6th April. The maximum level of tax-free cash is still capped by the ceding LTA at £268,275, equal to 25% of £1,073,100. High value pensions over the former LTA cap can now be crystallised without any LTA tax charge. However, it is important to discuss this with your adviser as there may be inheritance tax implications to consider.
Pensions remain free from inheritance tax and pensions inherited on death before age 75 are accessible tax-free but on death after 75, are taxed at the beneficiary’s income tax rate when drawn.
ISAs
The annual ISA allowance is currently £20,000 for adults and £9,000 for children under the age of 18.
It is possible for 16 and 17-year-olds to contribute into both adult ISAs (cash only) and junior ISAs, giving a total allowance of £29,000.
Capital Gains
Capital Gains Tax (CGT) is payable when assets are sold at a capital gain. This applies for assets held outside of ISAs and pensions, such as general investment accounts, directly-held shares and second properties. There is no CGT on the sale of a principal private residence.
Individuals have a CGT allowance of £6,000 in the current tax year, which is being reduced to £3,000 from 6th April 2024. Capital gains over the allowance are taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers (the applicable rates on residential property are 18% and 28%).
Realised capital losses can be used to offset capital gains realised elsewhere in the same or future tax years as a way to reduce CGT. If losses are reported to HMRC (via self-assessment) within four years, they can be carried forward indefinitely and used at discretion.
Dividends
The individual dividend allowance is currently £1,000, being reduced to £500 from 6th April 2024. Dividends are taxed at a lower rate of 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).
Tax on Savings Interest
As interest rates, particularly on cash savings having increased significantly it's crucial to be aware of the rates of tax applied to these payments and the individual allowances available. At current savings rates, you may need to have just over £20,000 in the top easy-access savings account to exceed the allowance.
The personal savings allowance is a tax-free allowance that lets you earn interest on your savings without paying tax on that interest. It's currently set at £1,000 for basic rate and £500 for higher rate taxpayers. It's not available for additional rate taxpayers.
Individuals with total income (excluding interest) of less than £17,570 may access the Starting Rate for Savings, giving an additional tax-free allowance of up to £5,000 for interest earned over £12,570 per annum. This band reduces by £1 for every £1 of income over £12,570 and is used up once income surpasses £17,570.
Gift allowances
When discussing Inheritance Tax (IHT) with new clients we often find that they're not fully utilising the various allowances available to them. Here are some of the allowances available:
- Annual exemption, which allows you to gift £3000 each year without inheritance tax implications and any unused exemption from the previous year can be carried forward.
- You can pay £9000 a year into a (junior) JISA with the funds available to them when they turn 18.
- You can also pay £2880 annually (gross £3600) into a junior SIPP without tax liabilities.
- Small gift allowance of £250 a year (per giftee), which you can give to as many family members as you wish.
- Gifts for weddings/civil partnerships which allows you to gift £5000 to your children, £2000 to a grandchildren/great-grandchildren and £1000 to any other person.
Obtain independent financial advice
From the topics highlighted within the guide we can see that there's a vast array opportunities to consider. Speaking to an expert will help analyse your situation and implement a plan tailored to your circumstances as we believe no client is the same.