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Individual Savings Accounts (ISAs) are an excellent way to grow, compound and enjoy income from investments completely free of tax. While there is no tax relief on contributions like with pensions, there is also no income tax or capital gains tax payable on money you take out of an ISA. And there are no age restrictions on when you can take money out, making ISAs a great tax wrapper for short and medium term savings as well as long term.
The exception is the Lifetime ISA, which comes with the bonus of a 25% top-up from the government on money you pay in (you can contribute up to £4,000 per year). However, you can only open one if you're between 18 and 39 and you’ll face a 25% tax charge if you withdraw money before the age of 60 for any reason other than to buy your first home.
The annual ISA allowance is £20,000 and if you don’t use it before the tax year end, you lose it. Check with your spouse or partner if they have used up their ISA allowance too, as with your allowances combined you can put up to £40,000 in ISAs each year. You can split your ISA allowance across multiple ISAs including a Stocks and Shares ISA, Cash ISA, Lifetime ISA and Innovative Finance ISA (which allows investments in peer-to-peer loans).
Under-18s also have an annual ISA allowance, and while it is only a reduced amount of £9,000, it’s a great vehicle for passing wealth to the next generation and for lending a helping hand to children or grandchildren, such as for a house or university fees, without affecting your own ISA allowance. While a parent or guardian must establish the Junior ISA, contributions can be made by anyone. Again, use this year’s allowance by 5 April or lose it.
Like with ISAs, pensions provide a tax-free wrapper for your savings and investments. Pension perks can include employer contributions as well as government contributions via tax relief top ups and tax savings for higher rate and additional rate taxpayers dependent upon the type of scheme you are in.
Each tax year a maximum of £60,000 can be contributed to your pension. You can carry forward unused annual allowances from the previous three tax years, but personal pension contributions are restricted by 100% of your net relevant earnings in the current tax year. If you’re a very high earner, every £2 of income over £260,000 reduces your allowance by £1.
Your annual pension contribution allowance reduces to only £10,000 once you have accessed the first £1 of income from a personal pension arrangement. This is called the money purchase annual allowance and it applies to defined contribution pensions, not defined benefit schemes. It’s not triggered if you’ve only withdrawn a tax-free lump sum.
In a year when CGT rates changed mid-year, it’s important to look at how your tax liability has altered because of that. On 30 October, the main rates of CGT increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers.
CGT rules allow you to set your annual exemption, £3,000 in the current tax year, against the capital gain that pays the highest rate of tax. So if you sold investments both before and after 30 October, you can utilise your annual exemption for the investments you sold after 30 October which are liable for the new, higher rates of CGT, maximising your tax saving.
There are other ways you can think strategically about CGT when selling assets, such as by selling some before 6 April and some after in order to utilise your annual exemption in two tax years. And don’t forget to consider if you have any capital losses from the previous four tax years that you could claim. A financial adviser will help you optimise your CGT planning.
Like the CGT annual exemption, which has been reduced from £12,300 to £3,000 since 2022/23, the dividend allowance has also taken a hit in recent years. In 2017 the annual tax-free allowance for dividend income was £5,000, now it’s just £500. Nonetheless, this is still tax-free income you shouldn’t forget about if you haven’t taken dividends yet this year.
Marriages and civil partnerships create numerous ways to reduce your tax liability. For example, if your spouse or civil partner doesn't work or has income under the personal allowance (currently £12,570), they can transfer up to £1,260 of their unused personal allowance to you, resulting in a tax saving of up to £252 per year. Transferring income-generating assets to your partner might also reduce your overall combined tax bill.
If you are worried that your loved ones could face an inheritance tax bill when you die, you need to be aware of the gifting allowance. Each tax year, you can gift up to £3,000 and that money will be exempt from inheritance tax. Any gifts exceeding that amount will be included in your estate for IHT purposes if you die within seven years (there are some exceptions).
The significant reductions in the CGT annual exemption and dividend allowance in recent years mean there is likely to be a lot of people with general investment accounts who don't necessarily realise their income and gains have become taxable. It’s important for anybody with a general investment account to have a look at their year-end certificate when it comes.
Gill Philpott“Have a look at your capital gains and dividend income because with the allowances now being only £3,000 and £500 respectively, very modest amounts held in a GIA will give rise to taxable income or gains,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd. “HMRC expects the taxpayer to tell them that they, the taxpayer, has got taxable income. They won't be writing to you to say, do you need to declare something? So the onus is very much on the taxpayer. As we saw confirmed in the Autumn Budget, HMRC are hiring 5,000 more staff for compliance, and they're taking steps to make sure everyone pays the correct amount of tax. If you are going to have a tax bill this year, there are a number of ways you can reduce that tax liability by leveraging the many reliefs, allowances and other mechanisms available to save you money. If you are saving for retirement, you also don’t want to miss out on the opportunities available to utilise various tax-free wrappers. Engaging with your Ascot Lloyd financial adviser and the specialist tax team will help you plan in the most tax-efficient way.”
Gill Philpott“Have a look at your capital gains and dividend income because with the allowances now being only £3,000 and £500 respectively, very modest amounts held in a GIA will give rise to taxable income or gains,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd.
“HMRC expects the taxpayer to tell them that they, the taxpayer, has got taxable income. They won't be writing to you to say, do you need to declare something? So the onus is very much on the taxpayer. As we saw confirmed in the Autumn Budget, HMRC are hiring 5,000 more staff for compliance, and they're taking steps to make sure everyone pays the correct amount of tax.
If you are going to have a tax bill this year, there are a number of ways you can reduce that tax liability by leveraging the many reliefs, allowances and other mechanisms available to save you money. If you are saving for retirement, you also don’t want to miss out on the opportunities available to utilise various tax-free wrappers. Engaging with your Ascot Lloyd financial adviser and the specialist tax team will help you plan in the most tax-efficient way.”
Speak to your adviser or book a free callback if you have any questions or concerns about tax planning.
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Important Information
Past performance is not a guide to future performance and may not be repeated. Investment involves risk.
This communication is for information purposes only and is based on our understanding of current UK tax legislation and HM Revenue and Customs (“HMRC”). Levels and bases of taxation and reliefs are subject to change and their value to you will depend on your personal circumstances. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation.
The FCA does not regulate inheritance tax planning
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.
This communication is issued by Capital Professional Limited, trading as Ascot Lloyd. Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS. Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614).