Making the most of your tax reliefs and allowances today can help you get closer to fulfilling your long-term goals tomorrow. Below we outline a tax planning checklist that can help you navigate the options and opportunities to make your money go further and ensure you start the next tax year on a sound fiscal footing.

Avoid falling into the 60% tax trap

If you earn £100,000 or more, your personal tax-free allowance of £12,570 is reduced by £1 for every £2 you earn over £100,000 which means you could be taxed at a rate of 60% on income between £100,000 and £125,140. One way to avoid this is to pay earnings above the £100,000 into your pension.

Top up Your Pension

Paying money into your pension pot is one of the most effective ways to benefit from tax savings. This tax year you can contribute up to £60,000 or 100% of your earnings, whichever is lower and receive tax relief. This allowance includes any employer contribution. Paying a lump sum into your pension can also help you pay less income tax and if your run your own company it can reduce your business’s corporation tax bill.

If you are a higher rate taxpayer or additional rate taxpayer you can get up to 40% or 45% relief respectively, but you will need to claim the extra tax relief above the basic 20% rate via your annual tax return.

You can also ‘carry forward’ any unused allowance from the previous three tax years.

How tax relief on pension contributions works

When you pay into your pension pot (up to £60,000 per year, or 100% of earnings, if less), you will receive tax relief on the contributions. So, to make a total contribution of, for example, £100:

How tax relief on pension contributions works example for total contribution of £100

You will need to claim any tax relief over the basic rate via your annual tax return.

A Junior SIPP

A Junior Self-Invested Personal Pension (SIPP) is an effective way to give a child a significant head start and make a real difference to their future. You can pay in up to £2,880 each tax year for the child’s future and get a 20% automatic boost from the government. A Junior SIPP is the same as a regular SIPP – the difference is that a parent or legal guardian manages the account and makes any investment decisions until the child turns 18. However, please note that under current rules the earliest your child or grandchild would be able to access the money is age currently 55 (57 from 2028).

Top up Your ISA

Each tax year it’s possible to contribute up to £20,000 into an ISA. If you’re a couple that could equate to £40,000 per annum. You can also contribute up to £9,000 per child into a Junior ISA, with the money accessible to them once they reach the age of 18.

Unlike some other allowances, with an ISA you can’t roll forward any unused allowance into another year, making it important to ensure you take advantage of this tax-free investment before 5th April.

As with all ISAs growth and income are free from tax, so as well as ensuring you make full use of your ISA allowance before this tax year end, it also makes sense to invest at the beginning of the next tax year (i.e. from 6th April 2024) so you get the full annual tax-free benefit.

Capital Gains Tax (CGT) Allowance – Use it or lose it

Each tax year you can make a set amount in capital gains before paying any tax – this is known as the ‘annual exempt amount’, or more simply your ‘CGT allowance’.

Last tax year the CGT allowance was £12,300 but it has been cut to £6,000 this tax year. From April 2024 it is being cut further to £3,000 and could change again in the future.

If you make any losses, you can use them to reduce any gains made in the same tax year. If you make more losses in a year than gains you should report them on your tax return, as they can be carried forward to reduce gains in future years. If you have forgotten to report losses, you can claim them up to 4 years after the end of the tax year in which the losses were incurred.

Dividend Allowance

In April 2023 the tax-free dividend allowance was slashed from £2,000 to £1,000 — affecting an estimated 54% of those receiving taxable dividend income, according to the government. A further cut, to £500, will take place in 2024.

Share your partners CGT and dividend allowances

Transferring investments to a spouse or civil partner can potentially increase your available dividend or CGT allowance if they are in a lower tax bracket, don’t work or haven’t fully used their allowances.

Make the most of your tax-free gifting allowances

Every year you can gift £3,000 to loved ones. If you have a partner then this could add up to £6,000 and you can also carry forward one year of unused allowance, which means in total you and you partner could gift up to £12,000 tax-free and it won’t be counted as part of your estate for inheritance tax purposes in the future.

Also exempt are wedding gifts from a parent to their child up to £5,000, from grandparent to grandchild up to £2,500, or up to £1,000 to anyone else.

In addition, contributions to charities or political parties are exempt as well as gifts valued up to £250, provided each gift is given to a different recipient and is the only tax-exempt gift they’ve received from you within that tax year.

Make investments in tax relief schemes

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief on the amount you invest, for SEIS this increases to 50% relief. This 30% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT and held the shares for five years, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.

These investment schemes should be viewed as high-risk investments and are only suitable for UK resident taxpayers with certain personal circumstances. However, they can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher or additional rate tax band.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.

Know where life can take you

No one likes to pay tax on their hard-earned money, but navigating the intricacies of the UK tax system is challenging. Fortunately, you don’t have to tackle tax planning alone. Our expert financial planners can help you to navigate the complexity of UK taxes, help you make the most of your available allowances and reliefs, and identify the best investment structures to preserve, grow or pass on your wealth.

Please get in touch if you’d like to speak to one of our financial planners today.

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Disclaimer

Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.

This article does not offer advice and the content and information about potential investments and services are designed for general use, and so cannot be considered personal to your circumstances or your financial position. It is important to obtain professional advice from an accountant or tax specialist before taking any action or making any decisions.

Important information

The information in this document is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgment as of this date and are subject to change. Past performance is not necessarily a guide to future performance. The value of assets such as property and shares, and the income derived from them, may fall as well as rise. When investing your capital is at risk. Copyright Investec Wealth & Investment Limited. Reproduction is prohibited without permission.

Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.