The end of the 2023/24 tax year is just over a week away.
With the UK tax burden hovering around 37% and near its highest since the Second World War, it’s more important than ever to ensure your investments are structured in the most tax efficient way, i.e. that you’re making the most of available allowances, reliefs and exemptions.
Below is a summary of the main personal tax changes that are due to come in from 6th April, and some last minute planning opportunities before the ‘final whistle’.
Personal tax changes for the 2024/25 tax year
The main changes that are relevant for personal investments and pensions are:
- A reduction in the tax-free Dividend Allowance from £1,000 pa to just £500. That is, the first £500 of dividend income will be tax-free, the balance taxed at your marginal rate – 8.75% for basic-rate taxpayers, 33.75% higher rate, 39.35% additional rate,
- A reduction in the tax-free Capital Gains Tax annual exempt amount from £6,000 pa to £3,000 for individuals (and from £3,000 to just £1,500 for discretionary trusts). That is, the first £3,000 of realised capital gains will be tax-free, the balance taxed at your marginal rate – 10% for a basic-rate taxpayer (18% on residential property), 20% higher or additional (24% on residential property – a reduction from 28% previously),
- For parents of young children, the income threshold at which child benefit starts to be withdrawn is set to rise from £50,000 to £60,000, and the rate at which it is withdrawn is also due to halve (now 1% per £200 earned in excess of £60,000, vs1% per £100 in excess of £50,000),
- ‘Eligible working parents’ will now be able to apply for up to 15 hours’ free childcare for 2 year-old children (previously3-4 only), as long as no parent earns more than £100k a year,
- The Lifetime Allowance for pension saving will be abolished.
As has been widely reported, most other reliefs and allowances remain frozen.
The usual suspects
Below are some last-minute planning opportunities to consider before the end of the tax year.
i. ISAs
UK resident adults (and overseas crown employees) can subscribe £20k to an ISA each tax year.
ISAs remain one of the most tax efficient forms of saving/investing, with no tax to pay on subsequent investment profits, and no restrictions (or tax) on withdrawal.
When investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we normally recommend a horizon of at least 5 years). Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
ii. Pension contribution
Pension saving is even more tax efficient due to the ‘quadruple whammy’ of:
- Tax relief on the initial contribution at your marginal rate of income tax (a £1,000 gross contribution costs a basic rate taxpayer£800, a higher rate taxpayer £600 and an additional rate taxpayer £550),
- Tax-free investment profits within the pension,
- The ability to withdraw up to 25% funds tax-freepost Minimum Pension Age (currently 55 but set to rise to 57 in a few years’ time), subject to a limit of £268k,
- The funds also sit outside your estate for inheritance tax purposes.
In terms of how much you can contribute personally, this is the lower of your relevant earnings (generally, work-related income) and the annual allowance of £60,000 (plus any unused allowances from the previous three tax years, aka. ‘carry forward’).
A pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
iii. Crystallise capital gains
Stockmarkets are around all-time highs, in which case, most ‘taxable’ portfolios (i.e. those outside ISAs and pensions) should be sitting on reasonable gains.
With the CGT annual exempt amount due to be halved (again)from £6,000 to £3,000, it may be worth crystallising some of these gains prior to tax year-end.
Consider the following example:
Claire invested £500k via a General Investment Account in September last year. After a surge in stockmarkets over the past six months, the portfolio is now worth £550k (+10%).
- Prior to tax year-end, she may choose to crystallise gains equivalent to £6,000 in order to fully utilise her tax-free capital gains tax annual exempt amount,
- She does this by selling 12% of the portfolio. This will realise proceeds of £66,000 and a gain of £6,000. That capital gain is fully covered by Claire’s tax-free allowance, hence no tax due,
- She might then choose to immediately reinvest the monies in a similar fund or portfolio, such that she remains fully invested for any further stockmarket gains. However, if she wants to reinvest in the same fund/portfolio as before, she’ll need to defer the repurchase for 30 days to avoid CGT-matching rules,
- Assuming she is a higher rate taxpayer, this strategy would potentially save her around £1,200 (20% x £6,000 capital gain). It does this by effectively resetting her base cost to a higher amount.
iv. IHT planning – utilise gifting exemptions
Finally, for those with an estate planning motivation (i.e. aiming to mitigate a potential inheritance tax charge on their estate), there are various gifting exemptions that apply per tax year:
- An annual gift of £3,000,
- Small gifts of £250 per person, as long as this doesn’t form part of the £3,000,
- Regular gifts from disposable income – this warrants a full blog in itself.
As ever, if you’d like to discuss any of the above, please let me know.
Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of each investor. The Financial Conduct Authority does not regulate tax advice.
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
