The tax year 2023/24 which ends on the 5 April, brings about opportunities to utilise any unused allowances. Taking advantage of these can ensure you don’t pay any more tax than you have to on anything you SAVE or EARN.
We want to help your money work as tax-efficiently as possible, so this guide outlines what allowances you are entitled to so you can feel confident with your money and the tax you pay. However, you must take advantage of these BEFORE 5 April.
Using your ISA Allowance
An ISA (individual savings account) is a tax efficient savings or investment account that allows you to maximise any returns you make on your money by shielding it from income tax, tax on dividends and capital gains tax.
In the 2023/2024 tax year, your ISA allowance is £20,000. You will need to make any unused contributions before 5 April 2024 and there is no rollover from one tax year to the next.
Adding a little to your ISA each year goes a long way. If you started an ISA with £5,000 and topped it up by £5,000 every year, the graph below shows how much it could grow thanks to compound interest.
Investing in your child’s future
Junior ISAs provide a valuable opportunity to invest in your child’s future. It allows you to build tax-efficient savings for your children that they can use for major expenses as they make an independent start in life.
Under-18s, or those who wish to save on behalf of a minor, can put up to £9,000 into a junior ISA for 2023/24.
When they turn 18, the account transfers solely to their control. At that point, the accumulated amount could fund a car purchase, help with university fees, a deposit for their first home or other needs as they begin independent adult life.
Another benefit is that you can gift money to children to invest into their ISA which removes the money from your own estate for tax purposes and your child can then receive tax-efficient benefits and compound growth from investing in a Junior ISA.
In the last 12 months, interest rates have risen significantly, which means that any savings you have in Cash ISAs are earning more than 12 months ago.
However, although your Cash ISA savings are doing better, inflation is currently topping 4%, so the spending power of that money is going down in real terms. If you’re holding a lot of money in Cash ISAs or cash accounts, you could miss out on potential growth that could go a long way to help you achieve the lifestyle you want in the future.
By diversifying your investments and considering a Stocks and Shares ISA, you expose yourself to the potential for higher growth, albeit with a higher level of risk. Over time, the returns from a Stock and Shares ISA have the potential to surpass those of a Cash ISA, and you’ll still benefit from tax-efficient gains.
The pension annual allowance for the 2023/2024 tax year has risen to £60,000 which includes contributions from yourself, your employer, any third party, as well as tax relief paid to the pension. However, you’ll only personally get tax relief on contributions up to 100% of your earnings if your earnings are less than £60,000. Using as much of this allowance as you can afford to is one of the ways you can reduce the amount of tax you pay.
Any money you save into a pension gets an immediate boost from the government in the form of tax relief. This increases the value of every pound you pay in, subject to eligibility.
Basic rate tax relief of 20% is paid automatically. So, if you’re a basic rate taxpayer, an £80 contribution is worth £100 through tax relief.
If you’re a higher rate 40% taxpayer, you can claim another £20 through your self-assessment tax return which you can then choose to reinvest in your pension. This effectively means that you pay £60, and the government pays £40.
Additional-rate taxpayers can claim up to 45% in pension tax relief.
Higher rate tax payers – those earning between £100,0000 – £125,140 can end up paying more tax, even 60% tax in some cases.
Once you’re earning £100,000 or more, the £12,570 personal allowance slowly reduces or tapers off. This means that for every £100 of income you earn, you only get to take home £40. £40 is deducted in Income Tax, while another £20 is lost by tapering of the personal allowance.
One way to mitigate the 60% tax trap is to pay earnings over £100,000 into your pension, which will take your taxable income below the threshold and allow you to keep your full personal allowance.
Remember the allowance is up to £60,000 into your pension each year, and still enjoy tax relief on your contributions.
Making savvy use of gift allowances annually allows you to pass on more wealth to loved ones tax-free during your lifetime.
You can gift up to £3,000 each tax year without owing any inheritance tax. Any unused annual exemption can also be carried over to the following year. So a couple can jointly gift £6,000 before tax year end, then carry over allowances from the previous year to remove even more taxable assets from their estate. Additional small gift exemptions up to £250 per person can further reduce eventual Inheritance Tax.
Any individual who makes gains on assets over the value of £6,000 this tax year will be required to pay capital gains tax on the excess amount at their marginal tax rate. This is a reduction from previous years, and from the 6 April 2024, the CGT allowance will fall again from £6,000 to £3,000.
There are several ways to reduce paying capital gains, and depending on your circumstances, these might include:
Taking advantage of your tax-free allowances can significantly reduce your tax bill, giving you more money to spend today or invest strategically into your future. Speak to us today to help your money work as tax-efficiently as possible so you pay the least amount of tax.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Although anyone can contribute to an ISA for a child only the parent/legal guardian can open the ISA for them.
Please note that Cash ISAs are not available through St. James’s Place.
 The Times: What 4% inflation means for your money