Tax planning might not sound very exciting, but it can have a dramatic effect on your personal finances. So, what can you do to make the most of your money?
Top up your pension
Pensions are now more flexible than they have ever been and remain extremely tax-efficient. You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, HMRC will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return. But you’ll need to watch out for the annual pension allowance. This is the limit on the amount that can be contributed to your pension each year while still getting tax relief. For the 2023/24 tax year, for most people it’s £60,000, or the value of your whole earnings – whichever is lower. Lower allowances may apply if you have already started drawing a pension, or if you are a higher earner with income plus pension contributions that total above £260,000.
If you’ve used your full allowance in the current tax year but not in recent years, you may also (depending on your circumstances) be able to ‘carry forward’ any annual allowance that you haven’t taken advantage of in the three previous tax years. The value of pensions can go down as well as up, and you may not get back as much as you put in.
Taking your ISA to the max
One of the easiest ways to reduce your tax bill is to shelter any returns above your allowances in an Individual Savings Account (ISA), which is a tax-efficient wrapper. For the 2018/19 tax year, you can put up to £20,000 into an ISA. For a couple with two children, the total ISA allowance available to the family is £48,520, which comprises £20,000 for each adult plus £4,260 of Junior ISA allowance per child. You won’t be taxed on returns from savings or investments held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make above the annual CGT allowance, which in the 2023/24 tax year is £6,000. The standard CGT rate is 10%, while the higher rate is 20%.
Getting personal with your allowance
Everyone has a certain amount of income they can earn each year without paying Income Tax, known as their ‘personal allowance’. For the 2023/24 tax year, this amount is £12,570. Your personal allowance is in addition to the Personal Savings Allowance (PSA). Your PSA depends on which Income Tax band you are in, with basic rate taxpayers entitled to a £1,000 allowance, while higher rate taxpayers receive a £500 allowance. Additional rate taxpayers are not eligible for a PSA.
Investors also have a dividend allowance, which means that individuals receive their first £1,000 in dividends tax-free, but any dividends above this amount will be charged at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. If one spouse is a higher rate or additional rate taxpayer and the other doesn’t pay tax at all, it could be more tax-efficient to put the account solely in the non-taxpayer’s name.
Keeping your inheritance in the family
Your estate is valued when you pass away and chargeable to Inheritance Tax (IHT) at 40%, although the first £325,000 nil-rate band (NRB) is exempt. Anything that goes to your spouse is also exempt. Married couples and those in registered civil partnerships can also benefit from an additional family home allowance, which makes it easier to pass on the family home to direct descendants without incurring IHT charges. The residence nil-rate band (RNRB) acts as a top-up to the current IHT NRB and works in a similar manner by reducing the value of your estate that is subject to IHT at the full rate of 40%. This additional relief is worth up to £175,000 per person.
Current tax rules also enable you to give away up to £3,000 free of IHT each tax year. You can give away more than this amount if you want to, but you must live for at least seven years from the date of the gift for it to be exempt from IHT.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.