The Financial Year end – Are you Ready?

By Ashley McCartney, Independent Financial Planner

Throughout the year you will have seen in wealth management the typical adverts and publications about topping up your ISA so that it is not lost, as well as ‘tax year-end planning’ which for personal and corporate clients alike, is hugely important.

You will have heard your Accountant, Financial Adviser or Tax Adviser say how important it is to utilise these allowances, and the most effective way to do this is to spread it across the year, so as we approach tax year-end it’s important to highlight what the allowances are and ask the question ‘Have you done enough?’

There have been a number of key changes to the allowances and thresholds, the following points provide the areas you may need to consider:

Income tax personal allowance

Let us start with the one that effects every person in the UK right now – Income Tax. There is a Fiscal drag with tax thresholds as they do not increase in line with pay. For example, you receive a 3% pay rise, but if the tax threshold has not then moved in line with this, you could be dragged into a higher tax bracket. This fiscal drag has the effect of raising government tax revenue without explicitly raising tax rates. Current tax thresholds are, as follows, over and above the personal allowance of £12,570 pa.

England, Wales and Northern Ireland:

There are many areas that could be considered here, but a good example if you claim Child Benefit and either you or your partner earn above £50,000, you could be subject to the High-Income Child Benefit Charge. Bringing your taxable income down – by making a pension contribution or charitable gift for example – could reduce or even eliminate that charge.

There are similar opportunities above the £100,000 threshold when the phasing out of the personal allowance begins and also at the additional tax threshold for those earning £125,140 and over.

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife, or civil partner which reduces their tax by up to £252.

Pension allowances

Next is the pension allowance and more importantly ‘Tax relief’ as this has been and will continue to be a major discussion point for ‘the powers that be.’ A flat rate of tax relief for all pension contributions has long been argued over, which, if adopted, would affect those in the higher tax band and above. Personal contributions are aligned to Net Relevant Earning whereas corporate contributions have no such limitation. The annual allowance for anyone in the UK each year increased to £60,000 in April 2023, up from £40,000.

Unspent allowances from the previous three years are not to be ignored as ‘Carry Forward’ allows you to make use of these if you were a member of a registered pension scheme during the relevant time period.

The important thing to remember here is that these calculations can be complex so getting trusted financial advice is paramount in maximising potential contributions.

ISA allowances

Typically, next we would look to maximise your annual tax-free allowance with an ISA – currently £20,000 per person per year. ISAs are a tax-free wrapper that allow you to invest in both Stocks & Shares as well as Cash, where the growth achieved (along with the capital) can be withdrawn tax free. Since 2016, ISAs can be ‘flexibly accessed’ meaning that, if you have taken any money out of your ISA, you can still replace it during the current tax year, and it will not affect your current year’s allowance. The £20,000 limit is only available per tax year meaning if you do not use it in the current year, unlike a pension where you can potentially go back, it is lost.

Capital Gains Tax changes

Whereas the previous points have been about mitigating tax, withdrawing monies from your investment also have certain tax advantages but need to be considered carefully as they can incur additional tax liabilities which have become subject to change since the last budget. The Capital Gain Tax exemption in the previous tax year was £12,600, has now been reduced by over 50% to £6,000. From the 2024/2025 tax year, the Annual Exempt Allowance will be reduced from £6,000 to £3,000 for individuals and from £3,000 to £1,500 for most trustees.

Explore Inheritance Tax allowances.

The Inheritance Tax (IHT) threshold has continued to remain frozen at £325,000 until 2028 and it is expected that many more people will be caught out by IHT over the coming years, as estate values rise through intergenerational wealth and property price inflation. In addition to this, homeowners in the UK can qualify for the Residential Nil Rate Band (RNRB) of £175,000. The RNRB is available if a person owned their own property, and they leave the property to certain relatives defined as ‘lineal descendants’ such as children or grandchildren. If a spouse leaves their estate to the survivor, the estate qualifies for 100% spouse exemption.

Currently, you can make annual and regular gifts out of disposable income, and you also have the ability to make any larger lifetime gifts to help reduce your IHT liability.

Like with pensions, the rules around IHT can be complex, and the amount of tax, and even the overall rate that will be paid, will depend on how your finances are structured during your lifetime, how you dispose of your assets and to whom you leave them. Seeking independent tax and financial advice can help you pass your assets to the people you want to benefit and potentially mitigate some or all of the IHT liability.

Why get Financial Advice?

The point of sound financial planning is not to look back and think “What could I have done?” but to look forward and think “what can I do?.” By planning ahead and taking advantage of available investment allowances, pension contributions limits and tax changes, we can ensure clients maximise how tax efficieny they are and have a plan to achieve their longer-term goals.

Planning for the future with a trusted financial adviser means you can plan an effective strategy to make use of the entire year with regular contributions rather than a lump sum at the end, easing the financial burden whilst maximising your individual contributions.

Here at Sedulo we are not transactional; we want to be on your journey with you. We have a vast range of experienced financial professionals from Wealth Management, Tax Consultants & Accountants who are able to provide a tailor-made solution for your specific set of circumstances.