How to make best use of your annual allowances

Tuesday 21 February, 2023

Aaron Abraham, independent financial adviser, Wimbledon reviews your tax allowances and when to use them. 

ISA allowance

If you haven’t already used your ISA allowance for the 2022-2023 tax year you can invest up to £20,000 in a Stocks & Shares ISA or a cash ISA, so a couple can invest up to £40,000.  Remember once we start a new tax year this allowance will be lost.

If you save into an ISA before paying into a general investment account you do not pay income tax on any gains or interest, and all future withdrawals from an ISAs are not subject to capital gains tax.

The Lifetime ISA allowance of £4,000 is also available to buy your first home costing up to £450,000 or save for your retirement.  To qualify and open a Lifetime ISA you must be over 18 years old but under 40 years old, you can add £4,000 per annum to a Lifetime ISA up to the age of 50. The government adds a 25% bonus to your savings up to a maximum of £1,000 per annum.  The £4,000 counts as part of your ISA allowance and you can hold it in stocks and shares, cash, or a combination of both.

You can invest on behalf of your children too.  Save up to £9,000 into a Junior Individual Savings Account (JISA) for a child in any tax year. Your child must be under 18 years old and living in the UK.  You can invest in a cash Junior ISA or a stock and shares Junior ISA.  You won’t pay any interest on any cash invested in a Junior ISA.   Similarly on the stocks and shares Junior ISA you won’t pay tax on any dividends you receive or on any capital growth. Any child holding a Child Trust Fund (CTF) (children born 1 Sept 2002 – 2 Jan 2011) can’t open a JISA without first transferring the CTF funds to a JISA and closing the CTF. Or £9,000 pa can be added to the CTF instead of a JISA.

Pension allowance

How can you benefit from using your pension allowance?

Saving into a pension can be a tax efficient way to save for your retirement.  Each person can contribute up to their annual earnings into their pension and get tax relief on those contributions, subject to an annual allowance limit of £40,000 (this includes both employee and employer contributions). If they don’t have earnings, they can contribute up to £3,600 gross and receive basic rate tax relief if they are under 75 years old.  Paying pension contributions can also be worthwhile for anyone on high incomes especially people earning between £100,000 and £125,140 as they effectively receive 60% tax relief on any pension contributions they make. 

Tax relief is available at a person’s nominal tax rate, anything between 20% and 45% (even non-taxpayers receive 20% tax relief on contributions to pensions operating ‘relief at source’ such as personal pensions). 

If you had a pension in place “Carry-Forward” can be available for the previous 3 tax years. To make use of this you must use the current tax year’s annual allowance and then you are able to go back 3 tax years and utilise any unused allowances.  Remember if you don’t use the carry forward from the 2019/20 tax year it will be effectively lost after the 2022/23 tax year.  Tax relief is restricted by the net relevant earnings in the current tax year.

Companies can also contribute to a pension plan on behalf of their employees/directors, and the company’s contribution is added to personal contributions when considering the annual allowance. 

Anyone employed can invest in their pension and use pension contributions to avoid paying higher or additional rate tax on their salary and bonus. 

Employer pension contributions subject to the annual allowance are viewed as a business expense so, if an employer makes a pension contribution instead of paying a dividend to a director, it may reduce the corporation tax paid on the company profits and personal dividend tax on the contribution.

Investing into a pension on behalf of someone else 

Even people who don’t work can benefit from tax relief on pension contributions, up to £2,880 per annum. They can then claim back £720 from the government who will top up the pension contribution to £3,600. 

This allows you to invest for adult children and grandchildren so they can save for retirement. Pension contributions made by another person still qualify for tax-relief at the recipient’s marginal rate.  

Capital gains tax

When you sell or dispose of an asset that has increased in value you are liable to pay capital gains tax on all personal posessions worth over £6,000 excluding your car, property that is your main home, or any shares that are not in an ISA or PEP.

All individuals currently have a capital gains tax allowance of £12,300 for 2022/23, although this is due to reduce. To find out how tax allowances will change in 2023 read:  Howard Goodship – End of tax year investment planning. If you use your capital gains tax allowance each year you could make considerable tax savings compared to deferring capital gains tax for future years.

This allows you to realise gains up to this amount without paying tax.  This only applies to investments that are not held in a pension or an ISA as there is no capital gains tax to pay on those investments.  If you have gains greater than £12,300 you pay 10% on these gains if the gains are in the basic-rate tax band when these gains are added to your total income.  You pay 20% on any gain or part of gain that falls within the higher rate tax band when added on top of your income.  Higher rates apply to residential property.

Aaron Abraham, independent financial advisor Wimbledon said: 

‘‘Making full use of your tax allowances for 2022/23 enables you to effectively plan your finances.  It is important to understand the differences between contributing to your pension or saving into an ISA.  Remember ISAs can be accessed when required, but you can’t take pension income until you are 55 (or 57 from 2028).  One key difference is that pensions don’t normally form part of your estate for inheritance tax purposes so they can be passed to your children without any inheritance tax implications.  Although some older pensions will pay into the estate on death. Unless, ISAs are left to a spouse/civil partner they are normally subject to IHT.   There are many tax allowances and several options available to you, therefore we recommend it’s important to take financial advice so our independent financial advisers can review your individual circumstances and recommend financial planning for your personal situation.  Pension legislation is particularly complicated which is why individuals need personalised financial planning advice. The above examples are broad and do not constitute financial advice but show what is possible if you use your allowances annually. If you are new to investment, we recommend you read our Beginner’s Guide to Investment.  If you would like to learn more about the financial planning opportunities we offer, please contact us on 01727 845500.  It is never too late to start planning for your future and taking financial advice just before the new tax year is a good time to begin.’

In Summary...

If you are looking to use your tax allowances before the tax year end, or require advice on inheritance tax planning, retirement income, investment planning or pension planning contact your local Lonsdale Wealth Management financial advisors in Wimbledon, Barnet, Leeds / Bradford, Stafford, Ware, Chippenham, Ringwood, Harpenden, St Albans now, or complete our booking form and we will contact you.  

Please note:

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. 

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

For more information read:

Simon Prestcote, chartered wealth manager Barnet – How much is your state pension worth?

Howard Goodship CFA, Ringwood- End of tax year investment planning

Simon Hawker – Lonsdale Services voted in top 100 financial advisers in UK

Howard Goodship IFA – Mitigating inheritance tax at the right time

 

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