This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Smith & Pinching in Norwich, Lowestoft and Eaton. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
The tax year is very important when it comes to saving on tax. Every April, various tax allowances are “refreshed” – often leading to missed opportunities for people to put hard-earned money back into their pockets. Yet by acting ahead of time, in the later months of 2023, clients still have time to explore their tax planning options and maximise their allowances.
Below, our financial planners in Norwich, here at Smith & Pinching, offer a short guide for those interested in getting the most out of the 2023-24 tax year. We hope these ideas are useful as you discuss your goals with your financial planner.
If you want to discuss your strategy and tax planning options with us, please get in touch to arrange a no-obligation financial consultation:
Strategies for the Personal Allowance
Many people know that cutting needless expenses (e.g. unused digital subscriptions) frees up your income for other, more important financial goals. Yet tax planning can be just as effective – if not more so – to help you save money.
Where do you start, however? One good initial area to explore is your income. In 2023-24, an individual can earn up to £12,570 without Income Tax. This is called the Personal Allowance and it “refreshes” every tax year (5 April to 6 April).
There are various rules about the Personal Allowance which can be used to optimise an individual’s tax position. For instance, if you are a Basic Rate taxpayer and your spouse does not earn anything, then up to 10% of the latter person’s Personal Allowance can be transferred to the former via the Marriage Allowance. This can reduce a household’s tax liability by £252.
If you earn over £100,000 in net income, then your Personal Allowance is reduced by £1 for every £2 earned over this amount. This system eliminates the tax-free allowance for those earning £125,140 or above and can impose an effective “60% tax” on income between £100,000 and £125,140.
Here, your pension could be your “best friend” to start reinstating your Personal Allowance. For instance, suppose you earn £110,000 and you make a £10,000 pension contribution. This results in an adjusted net income of £100,000 with an effective tax relief of 60% on the £10,000.
Acting earlier in the tax year, to maximise your income tax position, gives you more time to get your affairs in order and avoid last-minute “rushing” as the April tax year deadline approaches.
Strategies for tax-efficient returns
When your investments earn dividends or capital gains (from “asset disposals”), it is possible that they will be subject to tax. Yet various allowances are available to help protect your returns if you are strategic with your use of them.
A good starting point here is your ISA. In 2023-24, your ISA allowance lets you save/invest up to £20,000 into your account(s) and generate tax-free returns inside. Once the tax year ends, however, any unused allowance disappears. It is not “carried over” to the next year.
Thinking ahead about your ISA contributions can help you get the most from your ISA allowance, planning your contributions across the tax year rather than hoping you have a large lump sum to commit in February or March.
Outside of your ISA, moreover, there are two main allowances that may interest investors – the capital gains tax (CGT) allowance (also called the Annual Exempt Amount) and the Dividend Allowance. The former allows an investor to earn up to £6,000 in tax-free capital gains in 2023-24. The latter allows for up to £1,000 to be earned in dividends without tax.
These allowances are especially important in 2023-24 because they are set to “shrink” in 2024, to £3,000 and £500 respectively. This change will reduce investors’ abilities to shield their returns from tax if they are generated outside of a pension or ISA.
By planning in advance, now in late 2023, investors can work with a financial adviser to optimise the structuring of their portfolios – making the most of current allowances whilst they are still available.
A word on pensions
A pension is one of the best tools available for retirement planning. In particular, contributions can receive “tax relief” equivalent to the taxpayer’s highest marginal rate. For a Basic Rate taxpayer, for instance, this amounts to a 20% “boost” to their contributions. For someone paying the Higher Rate, the boost is 40%.
In 2023-24, the maximum an individual can contribute to a pension in order to obtain tax relief within a given tax year – assuming no “carry forward” from previous years – is £60,000 (assuming the Money Purchase Annual Allowance hasn’t been triggered and the individual isn’t subject to tapering.); or, up to their earnings for that tax year (whichever is lower), or £3,600 if they have no earnings. By planning ahead with your contributions, you may be able to improve your future retirement income by making the most of tax relief, employer contributions and other benefits.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: