Tax Year End: Ways to shield your money

February and March are particularly important months in the tax calendar. Here is a list of all the things you can do to be as tax-efficient as possible before the tax year closes.

February and March are particularly important months in the tax calendar. Here is a list of all the things you can do to be as tax-efficient as possible before the tax year closes.Planning for tax year end

Against a backdrop of two major conflicts and ongoing geopolitical turmoil, all of us are “feeling the pinch” one way or another. Just how much will vary from person to person, but conscientiously implementing a strategy to minimise your tax burden will stand you in good stead for being able to weather any challenges ahead.

Our advisers are available to help you optimise your financial affairs all year round. We consult, plan and execute alongside you so that you stay ahead of the curve and stray as little as possible from your own personal roadmap to financial freedom. That said, February and March are particularly important months in the tax calendar. If you have not already done so, you should use the next few weeks to check in with us and make sure you have done everything you can to be as tax-efficient as possible before the year closes.

Don’t sit on cash

Despite the volatility of the markets, sitting on mountains of cash is not necessarily the best thing to do: sure, you might be able to get as much as a 5% return if you shop around. But the real value of any mountain that you might manage to accumulate is growing only very slightly, and inflation could well hover at around 4% for some time. Also, remember that you will pay tax on any interest generated by savings in a standard bank account. If you are a 40% taxpayer, a 5% interest rate net of tax equates to 3%, which is currently below inflation. Government Gilts are once again a viable investment vehicle with a high degree of security. The tax-efficient returns they are currently offering compare favourably with deposit accounts for people holding cash outside a pension or ISA tax wrapper.

To give you a helping hand, here’s a quick tour of some of the opportunities available for efficiencies in areas like capital gains tax, inheritance tax, ISAs and pensions. Take stock, ensure that you have used all the allowances available… and act now if you have not already done so.

Income tax and pensions

“The only thing that hurts more than paying income tax is not having to pay income tax”, according to Thomas Dewar. Even better is simply to reduce your taxable income. And there are ways of keeping it within certain bands to avoid paying a higher rate.

One of the time-honoured ways of doing this is by increasing your pension contributions. Given how sticky inflation is proving, this is an excellent way of preventing the value of your money from being eroded. And since pension freedoms were introduced in 2015, they now play a key role in planning a tax-effective retirement strategy.

A number of major changes were introduced to pension allowances in 2023, and you should bear these in mind as the end of the tax year comes into view.

Most importantly, the pension annual allowance has increased from £40,000 to £60,000. This is the total that you and any third party (your employer, for example) can pay into your pension plans before you are liable for a tax charge.

The money purchase annual allowance has increased from £4000 to £10,000. This increase to £10,000 impacts people who have started taking their pension savings but want to keep paying into their plan. Those people can now pay in more than they previously could without facing a tax charge.

The minimum tapered annual allowance has risen from £4000 to £10,000, meaning that high earners can pay more into their plans than before without facing a tax charge. It affects people whose ‘adjusted income’ is more than £260,000 (previously it was £240,000). Adjusted income includes not just your earnings, but any returns from investments you may hold outside of tax-efficient accounts and – critically – the value of any pension contributions made by your employer.

Remember that pension carry forward allows you to take advantage of any unused pension allowance from the past three tax years. Including the current tax year allowance, that could be up to as much as £180,000.

But even if you have a huge carry forward allowance, you still have to have the taxable earnings to get tax relief on what you put in.

Capital Gains Tax

Changes are afoot with capital gains tax – the tax you pay on any profit when you sell something that has increased in value. Having been halved last year, the capital gains tax allowance is due to be halved again down to £3000 from April 2024. The race is now on to leverage that £6000 allowance for a final time. And remember: any unused amounts cannot be carried forward from one year to the next. Any allowances you don’t use… you lose.

Spouses and civil partners can be useful when it comes to CGT: transfers between spouses and civil partners will not trigger a CGT liability.

Inheritance tax

There is a great deal of uncertainty surrounding inheritance tax. The government is currently considering axing it (to boost the chances of a Conservative win in the upcoming election). And that is just one of a handful of major tax cuts that are reportedly being discussed by Downing Street.

Currently, everybody has a £3000 annual exemption that they can use every tax year. This is what you can give away each tax year without it being added to the value of your estate. Unused exemptions may only be carried forward for one tax year. So ensure that you use any available exemption from last year before the end of this tax year. There are, of course, other ways of minimising inheritance tax. Have a look at our article on estate planning to find out more.

Savings and investments

If you are married or in a civil partnership, make sure that both of you have enough in the way of savings income to use your £500 or £1000 personal savings allowance (depending on which income tax band you are in). Bear in mind that there is no personal savings allowance for additional rate taxpayers: it only applies to basic and higher rate taxpayers.

The dividend allowance – the dividend income that you can earn each year without paying tax on it – went down to £1000 this year. And it is due to go down to £500 from 6 April 2024.

Individual Savings Accounts (ISAs)

These have extremely favourable tax status. There are millions of pounds sitting in cash ISAs across the UK earning little or no interest, meaning that their tax-privilege status is of little use once you’ve considered all the investment risks, it’s got to be worth considering transferring this to a stocks and shares ISA. Remember that you can invest up to £20,000 each tax year, and ISAs are not subject to income and capital gains tax. If you have withdrawn any money from your ISA this year, you have until the end of March to replace what you have taken out, without your annual allowance being affected.

Gift Aid

In these challenging times, many of our clients have generously lent their support to several commendable causes and charities. Don’t forget that if you are a higher rate taxpayer, you can also claim an extra 25p for every pound that you donate to charity under the Gift Aid scheme. So if you donate £100 to a charity, the charity claims Gift Aid to increase your donation to £125. You pay 40% tax, so you can personally claim back £25 (20% of £125).

The Bottom Line

If we say this often, it’s because it’s true: maintaining good financial discipline, maximising appropriate tax advantages and having a clear financial plan tend to result in good financial outcomes.

The world is in a constant state of flux, and we can be pretty certain that domestic affairs and the geopolitical situation more widely will combine to create some challenges ahead. It is important that we use all the various allowances, exemptions and tax wrappers available to us now – some could be lost in the future as legislation changes.

Investment Quorum does not know for certain what the future holds, but our advisers will work with what they know today to help you achieve your financial goals for tomorrow.

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