At this time of year, it is also a good time to start planning our tax affairs before the end of the tax year on 5 April.
Tax planning is one part of meeting your financial goals. By taking action now, it may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later.
Topping up your pension
- Pensions are now more flexible than they have ever been and remain extremely tax-efficient. You’ll receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, HMRC will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return.
Topping up your ISA
- One of the easiest ways to reduce your tax bill is to shelter any returns above your allowances in an Individual Savings Account (ISA), which is a tax-efficient wrapper. For the 2023/24 tax year, you can put up to £20,000 into an ISA. For a couple with two children, the total ISA allowance available to the family is £58,000, which comprises £20,000 for each adult plus £9,000 of Junior ISA allowance per child.
- You won’t be taxed on returns from savings or investments held in an ISA, nor will you have to pay Capital Gains Tax (CGT) on any of the profits you make above the annual CGT allowance, which in the 2023/24 tax year is £6,000, reducing to £3,000 from April 2024. The standard CGT rate is 10%, while the higher rate is 20%.
Keeping your inheritance in the family
- ISAs and pensions are the two big ways to shelter your money from tax, but there are other tools at your disposal. Your estate is valued when you pass away and chargeable to Inheritance Tax (IHT) at 40%, although the first £325,000 nil-rate band (NRB) is exempt. Anything that goes to your spouse is also exempt.
- The residence nil-rate band (RNRB) acts as a top-up to the current IHT NRB and works in a similar manner. It is potentially available for death on or after 6 April 2017 where, in general terms, an interest in the family home is left under your Will to your children, grandchildren or other lineal descendants. The RNRB is set-off against the value of your estate ahead of the NRB, and the maximum amount allowed on a death in the 2023/24 tax year is £175,000.
- Current tax rules also enable you to give away up to £3,000 free of IHT each tax year.
