The government is forecast to take a total of £950bn in tax this tax year. At over a third of GDP, this is set to be the highest tax burden the UK has faced since just after the Second World War.
Of course, tax is important. But that doesn’t mean you need to pay more than you have to.
It’s important to build a well-thought-out tax planning strategy as part of your overall financial plan. A good starting point is to work out how much tax you’re likely going to have to pay – an accountant can help here. Once you know this, you can then look for ways to try to reduce your tax bill.
Income tax, dividends, pensions, savings, investments, inheritance tax, and gifting are all areas where you could make tax savings depending on personal circumstances.
This article is not personal advice, if you’re not sure what’s right for you please ask for advice. Tax rules and ISA and pension rules can change and benefits depend on personal circumstances. Investments and any income from them can fall as well as rise in value so you could get back less than you invest.
Understand your income tax band
Getting to grips with income tax and how much you’ll pay is essential, including the current tax year's Personal Allowance, which is £12,570 for 2023/24. You’ll then get a better idea of how much income you’ll have after tax and be able to plan your spending and where you might be able to save more.
You could consider transferring Personal Allowances within your family. For example, if you haven’t used all your allowance this tax year, you might be able to transfer £1,260 of your Personal Allowance to your spouse or civil partner if they’re a basic-rate taxpayer.
Make the most of your dividend allowance before it halves
On 6 April 2024, the dividend allowance is reducing from £1,000 to £500. It’s important to take advantage of this tax allowance before it’s halved.
Currently, the first £1,000 of dividends are tax-free, regardless of which income tax band you fall into. This relief is in addition to your Personal Allowance.
If you’re married or in a civil partnership, you could consider gifting investments to your spouse or civil partner to use their dividend allowance if it’s not already been used. Before making decisions, discuss your options as a couple.
Capital gains tax allowances are also halving
Take advantage of your annual capital gains tax (CGT) exemption for the tax year, which is £6,000 for 2023/24, before it’s halved on 6 April 2024.
This is a ‘use it or lose it’ exemption, so it’s not possible to carry it forwards into the new tax year. Similar to your dividend allowance, you might be able to transfer assets to your spouse or civil partner.
If you have any of your CGT exemption for this tax year remaining, you might be able to sell investments and then move that money across to a tax wrapper product like a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP).
Even if you’ve used your 2023/24 pension and ISA allowance, it might still make sense to sell investments that you’ll pay CGT on during the 2023/24 tax year while the CGT allowance is higher. Then you can move the money across once your allowances renew on 6 April 2024.
Remember though, for this to be effective, you must not invest in the same investments you sold within a general investment account - like our Fund and Share Account - for at least 30 days after selling them.
Use your ISA allowance this year before it’s gone
The ISA limit for the 2023/24 tax year is £20,000 so it’s well worth using as much of that as you can before it resets. You’ll get a new ISA allowance for 2024/25, but some of the rules are changing.
From 6 April 2024, you’ll be able to contribute to multiple ISAs of the same type in the same tax year. For example, you will be able to contribute to more than one Cash ISA or Stocks and Shares ISA each tax year, providing your overall contributions don’t go over £20,000.
You could also look into opening a Lifetime ISA to help with buying your first home, or as part of your retirement plans to complement your pension if you’re under 40.
If you’ve decided to contribute to a Stocks and Shares ISA this tax year but you’re undecided on where to invest, get your money in as cash by 5 April 2024 to secure your 2023/24 ISA allowance. You can then choose your investments later on.
Think about your inheritance tax thresholds and gifting
This year, the nil rate band (NRB) is £325,000 and residential nil rate band (RNRB) is £175,000. These inheritance tax (IHT) thresholds have been frozen for the last few years. So if your estate has previously been close to them, it might have increased in value and tipped over into tax paying territory.
Gifting can be an effective way to help reduce your IHT liability.
Everyone can gift away £3,000 each tax year and this money is immediately exempt from IHT. You can also backdate this allowance one tax year if it was unused, so some people might be able to gift away £6,000 this tax year. Remember, this allowance is per person – you could gift more as a couple.
Don’t forget about your pension allowances
Use tax-efficient employer pension contributions and check in with your personal contributions to get pension tax relief. You can get tax relief on your contributions, as long as they aren’t any higher than your earnings.
If you’re close to the Pension Annual Allowance or Lifetime Allowance, discuss with your family members about the possibility of contributing to their pensions to keep you under these thresholds.
Under the pension annual allowance, most people can contribute up to £60,000 a year (includes employer and personal contributions, plus any tax relief) into a pension scheme. If you’re a higher earner or you’ve already accessed your pension, your annual pension allowance might be lower.
The three years before 2023/24, this allowance was £40,000 for most people. If you haven't made use of your full annual allowance in the previous three years and were a member of a qualifying pension scheme, you can use your previous allowances using the pension carry forward rule.
The lifetime allowance for 2023/24 is £1,073,100, and is due to be removed from 6 April 2024, and a new Lump Sum allowance and a Lump Sum and Death Benefits allowance introduced.
Even if you’re no longer working, you can still contribute £3,600 gross (£2,880 net) to a pension each tax year and receive tax relief up until you turn 75.
As pensions are held outside of your estate for IHT purposes, it could also reduce the IHT payable on your eventual estate.
Please remember pensions are designed to help you prepare for retirement, so you can’t usually access them until age 55 (57 from 2028).
If you think you could benefit from getting expert financial advice from a professional like Hugh, contact our helpdesk today. The team can talk you through the advice service we offer, including charges and connect you with an adviser.
You won’t get personal advice from our helpdesk, but if advice is right for you, they’ll put you in touch with an adviser.
We can help you make the most of your allowances and pay less tax with careful financial planning. But in complex situations your adviser might recommend speaking to an accountant or lawyer to complement their advice.