5 practical steps to make the most of your valuable allowances before the tax year-end

In recent years, many valuable tax allowances and thresholds have either shrunk, or failed to keep up with the cost of living.

In the Autumn Statement, Jeremy Hunt continued with this theme, see our recent summary here.

So, it’s more important than ever to make the most of these valuable tax breaks when you can.

With the 5 April not that far away, now’s the time to act.

Here are five practical things you might want to do to get the most from the available tax breaks before the tax year-end.

1. Make the most of your ISA allowances

When you save or invest in an ISA you benefit from paying no Income Tax or CGT on the proceeds. So, it’s worth maximising your family’s tax-free saving every year. If you don’t use the ISA allowance, you lose it – you can’t carry forward any unused allowance to a subsequent tax year.

Remember that, as well as being able to invest up to £20,000 for you and your spouse, you can invest up to £9,000 for each child under 18 in a Junior ISA.

And, if you have children in your family aged 16 or 17, you can also contribute to an adult ISA in their name. This means you can save/invest £29,000 tax-efficiently in the child’s name before the tax year-end.

If you’re aged between 18 and 39, a Lifetime ISA (LISA) is a useful choice if you’re saving to buy your first home, or for retirement. You can save up to £4,000 each year – either in one or more lump sums or as a regular monthly saving – and you’ll receive a government bonus of 25% on your savings.

Note that if you withdraw from a LISA before age 60 for anything other than buying your first home, you’ll pay a 25% penalty to recoup the government bonus.

2. Maximise your pension contributions

Make your own contributions

If you can, make use of your pension Annual Allowance. For most people this is £40,000 gross each year, unless you earn more than £240,000 or you have started flexibly withdrawing your pension, in which case a lower allowance will likely apply.

You can make personal contributions to 100% of your earned income and tax relief is available up to your highest marginal rate of Income Tax. That’s potentially up to 45% relief – remember that if you are a higher or additional-rate taxpayer you’ll normally need to claim this relief through self-assessment.

Non-taxpayers still receive tax relief so they can be a good choice for children or grandchildren.

Even if you have no earnings at all, you can contribute £3,600 and still benefit from tax relief on the contribution at the basic rate. So, as well as contributing for you and your spouse, you can invest the same amount for each child or grandchild to build up savings for them.

If your child or grandchild is under the age of 18, you can pay up to £2,880 into a pension for them this tax year. Even though a child won’t typically pay tax, you’ll still benefit from £720 in tax relief and the child’s pension fund will then benefit from a total contribution of £3,600.

Remember that an individual can’t normally access pension savings until age 55 (rising to age 57 in 2028). So, a child or grandchild won’t be able to use these funds to achieve other life goals, such as paying for university or buying their first home.

Help out adult children or grandchildren by boosting their pension.

If you have adult children or grandchildren, you can also make pension contributions on their behalf.

Any contribution you make to their pension is treated as if it was made by them. So, if they are a basic-rate taxpayer and you pay £800 into their pension, they will get tax relief taking the total contribution to £1,000.

If your child or grandchild is a higher or additional-rate taxpayer, they can claim the additional tax relief on the contribution you make through their annual tax return.

If your child or grandchild earns between £50,000 and £60,000 and is affected by the High Income Child Benefit Charge then your pension contributions will also help them in this regard. That’s because any money you contribute to their pension will be deducted from their income before the charge is calculated, thereby potentially reducing their tax charge.

Pensions can be a tax-efficient way for business owners to withdraw profits.

If you own a business, pension contributions can be a tax-efficient method of withdrawing profits from your business, especially with the rate of Corporation Tax going up from 6 April 2023.

Don’t forget to consider “carry forward” relief, where you can potentially mop up unused relief from the previous three tax years once you have maximised your contributions in the current tax year.

A pension contribution can help you if you earn between £100,000 and £125,000

Another point to consider is where your income is between £100,000 and £125,000. Here, a pension contribution could help you get some or all of your Personal Allowance back and is consequently even more tax-efficient.

3. Crystallise some capital gains

Crystallising gains up to the CGT annual exemption has been a regular staple of tax year-end planning for many years.

The annual exemption of £12,300 is worth up to £2,460 a year (2022/23) for a higher-rate taxpayer and you can’t carry this forward.

With the changes in the Autumn Statement setting out that the CGT allowance will drop to £6,000 in April 2023 and then to £3,000 in April 2024, this will be your last opportunity to benefit at this level.

You’ve previously read about why crystallising gains each year can help you to save tax. If you accept that CGT must be paid at some point in the future, it’s essentially an argument between emotions and maths.

  • If you crystallise gains now, use your annual exemption, and pay CGT at 10% or 20% you have less in the account post-reinvestment
  • Or, you could have a larger amount invested but you’ll be loaded with CGT.

The compound effect of using an annual CGT allowance is significant (albeit diluted to some extent by the changes from next year), and so the allowance should be utilised, where available and practical, each year.

Of course, everyone’s circumstances are different and so we recommend speaking to us before making any decisions in this regard.

4. Use your gifting allowances, and remember to gift from income

Gifting is a great way to reduce the value of your estate, and a potential future IHT liability. So, don’t forget to use your annual gifting exemption.

You and your spouse/partner can gift up to £3,000 each tax year and if you didn’t make gifts last year, you can carry forward one year only of an additional £3,000 each.

As well as helping the recipient, this helps reduce the IHT liability on your estate after death. There are other exemptions to consider too, such as:

  • Small gifts exemption of up to £250
  • Gifts for a wedding or civil partnership of up £5,000 for a child, £2,500 for a grandchild or great grandchild or £1,000 for anyone else
  • Gifts to charity.

One of the most valuable IHT exemptions for high earners is the exemption for “gifts from normal income”.

  • You must make your gift from income (not capital).
  • The gift must be part of your normal expenditure.
  • The gift should leave you with sufficient income to maintain your standard of living.

For example, you might pay pension contributions for a family member or pay school fees for a grandchild.

One of the key requirements of making gifts from income is that they are regular, both in terms of frequency and value. This means that you should ensure you make your gifts from income each tax year. If you don’t, HMRC may decide that your gifts do not satisfy the requirements of this exemption.

5. Make the most of other tax-efficient investments

If you’ve utilised your ISA and pension allowances, other forms of tax-efficient investment can then be attractive to certain types of individuals.

You can normally invest up to £1 million in the Enterprise Investment Scheme (EIS) and up to £200,000 in Venture Capital Trusts (VCTs). Both offer 30% tax relief on your investment, as long as you owe sufficient other tax to fully benefit from this. You must hold an EIS for at least three years and a VCT for five years to maintain all the tax advantages.

Such investments are high risk and so not suitable for everyone. However, one particular advantage for high earners who have used up their pension and ISA allowances (and perhaps where the pension Lifetime Allowance may be an issue) is that VCTs can be used to create a tax-free income stream from dividends, supplementing future retirement income.

Get in touch

If you’d like to make the most of your tax allowances and exemptions before the end of the tax year, please get in touch.

Send us a message via the HFMC Wealth website or call us on 020 7400 4700 to find out more today.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Enterprise Initiative Scheme (EIS) and Venture Capital Trusts (VCTs) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.

Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.

Tax levels and reliefs could change, and the availability of tax reliefs will depend on individual circumstances.

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