New Year, What Allowances Haven’t You Used Yet?

As we approach the end of the tax year, it's essential to look back and see which tax allowances you still need to utilise. Most tax allowances are provided on a "use it or not it" basis, so it's essential to do a final sweep before you sit back and relax. Where should we start??

ISA contributions

While there was speculation that the ISA contribution would be reduced in the last budget, there have been no changes so far. Consequently, you can contribute as much as ￡20,000 to your ISA in the current tax year. However, what about your spouse or partner? Have they maximised their own ISA allowance? If not, you may be able to contribute a further ￡20,000 within their tax-free wrapper.

This is a handy addition to your own ISA funds, not only in terms of contributions but also potentially enhanced tax-free returns in the long term.

Junior ISAs

While many of us are reluctant to start planning for life after our death, you can contribute up to ￡9000 per child/grandchild into a Junior ISA each tax year. Not only will this potentially build a significant nest egg for their later years, but it is also a valuable means of reducing your estate and potential inheritance tax liabilities in the future.

Pension contributions

You can contribute the lower of 100% of your annual salary or ￡60,000 per annum into your pension fund. This includes tax relief and any contributions from your employer. Still, you can also bring forward any unused contribution allowance from the previous three tax years (assuming you were part of a pension scheme). While there is a tendency to utilise this option just before retirement, you should consider it on an ongoing basis, assuming it is affordable.

Capital gains tax allowance

There is an ongoing reduction in the capital gains tax allowance, ￡12,300 in the tax year 2022/23, falling to ￡6000 in the current tax and set to fall further to ￡3000 in the 2024/25 tax year. Consequently, it is crucial to utilise not just your capital gains but also your capital losses, where applicable. This ongoing change further highlights the benefits of tax-free investment vehicles such as ISAs and pensions, which should be integral to your long-term financial planning.

Income tax allowance

Introducing what is known as "fiscal drag", i.e. not increasing the income tax allowance in line with inflation, will see millions pay more tax. Some employees will also move into a higher tax band on what might be relatively small salary increases. Increasing your pension contributions or making charitable donations will help to reduce your gross income and income tax liability. There may also be the option to discuss "salary sacrifice" with your employee, switching an increase in your salary for enhanced employer pension contributions.

Dividend income tax allowance

In line with the capital gains tax allowance, there is an ongoing reduction in the dividend income tax allowance. This has fallen from ￡2000 in 2022/2023 to ￡1000 in the current tax year and is set to fall further to just ￡500 in the 2024/25 tax year. If you own a business, swapping part of your income for dividends may be an idea, which would also allow you to reduce your national insurance contributions.

Gifting allowance

Under current regulations, you can gift up to ￡3000 per tax year free of any tax liability, a useful means of distributing your estate before death. However, many people fail to realise that even if you are married or in a civil partnership, this is a ￡3000 annual allowance per person. Consequently, combined, you could give away up to ￡6000 tax-free each year.

Additional allowances include the small gift allowance, up to ￡250 per person each tax year, but only to those who have not received funds under any other allowance. Depending on your relationship with the individual, you can contribute up to ￡5000 to wedding/civil partnerships, where you can combine allowances except the small gift allowance.

Summary

There are four main goals for tax planning; maximising tax-free investments, minimising income and capital gains tax and reducing long-term inheritance tax liabilities. While some allowances can be backdated, many are available on a "use it or lose it" basis, which means they are time-critical. Even though this article does not include the potential benefits of detailed long-term tax planning, these are the low-hanging fruits available to all of us.

If you're unsure how to maximise your allowances and minimise tax liabilities or require advice about long-term tax planning, please contact me, and we can put a date in the diary.