Use it or lose it – How to use your allowances this tax year?

The tax year-end is just around the corner, and you may be thinking ‘what should I do before the 5th of April?’ 

One of the main things we think you should look at is; making sure you are utilising the allowances and tax breaks that are available. Here are some of the more popular ways to utilise your allowances this tax year. 

1.   Top up your ISA

ISAs are a terrific way to make your money work harder for you, because any money you deposit or invest is exempt from future Income Tax or Capital Gains Tax (which means there is no tax on interest accrued, no tax on withdrawals, and no tax on profits). This tax year (ending 5th April 2023), you can contribute up to £20,000 per person to an ISA.

ISAs are a great way to get started with stocks and shares investments as they are easy to set up and although they should be considered longer term investments, should the worst happen, they can be accessed relatively quickly.

One of the few downsides is you can’t carry forward any unused ISA allowance into the next tax year – so, it’s a case of use it or lose it before 5th April.

2.   Contribute towards your retirement

Similar to your ISA, it can be wise to think about topping up your pension to improve your retirement savings. Depending on your situation, you should obtain Income Tax relief by investing in a pension. 

The annual allowance for pension contributions in the current tax year (22/23) is the lower of £40,000 or up to 100% of your earnings.  If you haven’t used your annual allowance in previous tax years, depending on your personal circumstances it might be worth considering carrying forward any unused allowance from previous tax years and topping up your pension before the end of this tax year (5th April). It’s worth noting that company contributions are not limited to the level of your salary.

3.   Save for your children

If you have kids, you might want to start setting money aside for when they are 18 years old. 

A parent or guardian can open a Junior ISA on behalf of their child and save up to £9,000 each tax year, this money can only be accessed by the named child at the age of 18. As with other ISAs, returns made on the money in the Junior ISA are free of Income Tax and Capital Gains Tax. 

4.   Use your Capital Gains Tax allowance

Some people find the rules around Capital Gains Tax (CGT) confusing, which can lead to penalties for not paying any tax due on time.  

When you sell an asset for a profit, the gain you make is usually subject to CGT. This can include gains or profits from stocks and shares or a second home. Selling a personal item such as jewellery or antiques for more that £6,000 could attract CGT. Many people fall foul of the rules by thinking that personal items are not subject to CGT. 

Everyone has an annual allowance, gains up to the allowance are exempt from tax. This tax year that allowance is a tax-free limit of £12,300; after that, the rate of tax you pay is based on your Income Tax rate, with basic-rate taxpayers paying 10% and higher-rate taxpayers paying 20% (and 18% and 28%, respectively, if you are selling a home). This allowance is set to reduce significantly in future tax years so it might be worth reviewing your position now.

5. IHT

Whilst Inheritance Tax is payable on your death, there are tax breaks you can take advantage of whilst you are still alive to reduce the potential liability for your family.  

Each tax year you are entitled to give away a total of £3,000 worth of cash or gifts, this can be to one individual or a group of people.  Unlike your ISA allowance you can carry forward any unused allowance from the previous tax year into the following tax year, meaning if you haven’t done so already you could gift up to £6,000 before the end of the tax year.

You are also entitled to give a tax free gift to someone who is getting married or starting a civil partnership, up to £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to any one else.

It is worth noting however that some gifts could come back into your estate should you die within 7 years of making them and be subject to Inheritance Tax. 

This blog is for guidance only and is not to be construed as advice. If you would like to discuss any of the options in more detail, please contact us in the usual way letstalk@fathomfinancial.co.uk or call us on 01388 439840.