A New Year: Planning Your Allowances

In the world of personal finance, the phrase, “saving a penny today can reap rewards tomorrow”, really resonates, especially at the start of a calendar year when we’re all thinking about resolutions and goals.

Through disciplined financial planning, the act of setting aside even a modest sum annually can wield long-term benefits.

Changes to the new tax year

As we look forward to the next tax year (starting 6th April 2024), there will be significant changes to tax allowances, affecting Capital Gains Tax.

The biggest change for the new tax year is the reduction in Capital Gain Tax allowance: this was £6,000 for 2023/24 (half of what it was a year before); it’s going to halve again for 2024/25 to £3,000.

Make sure you speak with your Financial Planner before the tax year-end to ensure you’re making the most of your allowances. It’s even more important to get the most out of your ISAs and pensions – let Attivo help you work your money to be as tax-efficient as possible.

Tax planning is an activity that is not regulated by the FCA.

Capital Gain Tax allowance

Capital Gains Tax is a tax on increases made on the value of your assets. For example, this could include the sale of a second home, business asset or the sale of shares.

Currently, the allowance is set at £6,000, meaning you can make up to £6,000 of profit on your assets before the applicable rates begin. However, from 6th April 2024, the allowance will be halved to £3,000.

This cannot be carried forward between tax years, so it’s a very useful allowance to utilise each year. There are many complexities within the rules, so we recommend you contact your Financial Planner for advice within this area.

If you’re in a civil partnership or married, assets can be exchanged between you. And if you have joint ownership of a taxable asset, e.g. a second home, the allowance doubles (£12,000 in 2023/24).

However, if you transfer assets to a partner and make a gain from this later on, the Capital Gains Tax that you pay will be based on the total time you owned the asset(s) together, instead of the date of the transfer.

If you sell a second property or main home, that you have let, used it for business purposes, or it’s very large, you’re liable to pay CGT*.

*18% for basic and *28% for higher rate tax payers for any residential property sold (excluding an individual’s Main Residence, which is exempt from CGT). Private Residence Relief may not be available for the whole of a property which exceeds 5000 square metres.

It’s worth utilising the spousal exception. Any gifts transferred between spouses isn’t liable for CGT; therefore, a spouse who is a basic rate tax payer could dispose of the required asset to not only utilise their individual allowance of £6K, but would also pay any residual CGT at a lower tax rate (10%* for basic rate vs 20%* for higher/additional rate taxpayers).

Tax planning is an activity that is not regulated by the FCA.

ISA allowance

When saving for your future, such as a house deposit, putting money away into an ISA is a great flexible and tax-efficient way. Plus, you don’t pay any Capital Gains or Income Tax on the money you may withdraw, or on any growth within the fund.

While these benefits make ISAs a popular way to save and plan your finances, you still need to be mindful of the ISA allowance.

This is the cap that the Government put on how much you can add into your ISA in any tax year. This is currently set at £20,000 (aged over 16 years for Cash ISA and over 18 years for Stocks and Shares ISA) and can’t be carried forward between tax years.

The ISA limit for Junior ISAs (parents and grandparents) is £9,000 per annum (up to age 18) – again this cannot be carried forward between tax years.

Pension Annual Allowance

The Pension Annual Allowance is the maximum you can pay into pensions in a single tax year, whilst still receiving tax relief.

Currently this stands at £60,000. However, clients can utilise something called ‘’Carry Forward’’ to potentially contribute more, up to a maximum of 3 tax years prior. This is dependent on many individual circumstances, mainly annual income and membership of a registered pension scheme. We recommend you speak with your Financial Planner for an accurate calculation and advice on how much can be contributed to claim the maximum reliefs available for this tax year*.

*Clients can only claim tax relief up to 100% of their current tax year annual earnings, i.e. client on £30,000.00 per annum can only claim tax relief on pension contributions up to this point – both individual and employer contributions. So, whilst this example client has an annual allowance of £60,000 – it would only be beneficial from a tax relief basis for the client to place £30k into the pension. Again, key for clients to contact their Financial Planner for advice in this area.

Some individuals may have a ‘Tapered Annual Allowance’, depending on the level of their income; this means that they may have an Annual Pension Allowance as low as £10,000.

Children’s Pension Contributions

While saving for retirement and thinking about pensions might not be top of your list when growing up, starting a pension for your children as early as possible can help provide financial wellbeing for them and any future family.

Pensions give you a great a tax-efficient way to save, and creating a pension as early as you possibly can means even the smallest contributions have more time to grow.

Contributions up to £2,880.00 per annum per each individual child*, with basic rate tax relief of 20% applied (£720), increases to £3,600 per annum.

*N.B. Parents/Legal Guardians are required to open a Junior Pension/SIPP and cannot be opened by a Grandparent or any other family member. Once the parent/legal guardian has opened the account, Grandparents or any other interested parties are then able to make contributions on the child’s behalf.

Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. This includes all money, property and possessions. How much you may need to pay is based on the value of the deceased’s estate. The standard Inheritance Tax rate is 40% and is only charged on the part of your estate that’s above the tax-free threshold, which is currently £325,000.

The first £3,000 can be given as a gift as it doesn’t form part of the estate so isn’t subject to inheritance tax. This can also be carried back one year, so a potential maximum of £6,000 to fully utilise.

Gifts

In addition, you can make a gift to friends and family to reduce the value of your estate for Inheritance Tax purposes. These can include:

• £250 small gifts – Clients are able to gift a one off payment of up to £250 to anyone that they like, however this has to be different individuals each time, they cannot be the same person
• Gifts for weddings or civil partnerships – each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:
  • £5,000 to a child (these are individual allowances, so potentially gift of £10,000 from both parents)
  • £2,500 to a grandchild or great-grandchild (these are individual allowances, so potentially gift of £5,000 from both grandparents)
  • £1,000 to any other person

Clients giving gifts to the same person can combine a wedding gift allowance with any other allowance, except for the small gift allowance. For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

Inheritance Tax planning is an activity that is not regulated by the FCA.

Speak to your Financial Planner to reap the benefits

The cumulative effect of consistently saving even a modest amount annually can snowball into a considerable fund, providing financial security, opportunities, and peace of mind in the future. Embracing a proactive savings mindset can be the catalyst for a more financially stable and rewarding tomorrow.

Contact your Financial Planner before April to ensure your finances are on track.