By Arjun Kumar, founder of Taxd
With under two weeks left before the tax year deadline, there’s a rush to the exit as taxpayers seek to maximise their 2024/25 tax allowances.
Such allowances are “tax-efficient” as they minimise a taxpayer’s liability, causing them to miss out on tax-free growth or income. Most are, however, finite, and they don’t roll over. Each year, these allowances reset on 6 April.
That opportunity is lost forever, reducing your wealth-building potential, leaving you with avoidable tax bills.
To maximise these annual limits, here are some strategies allowing you to make the most of your money:
Individual Savings Account (ISA):
The ISA allows individuals to save or invest without attracting tax on the interest, dividends, or capital gains earned within the account, up to an annual allowance set by the government (£20,000 per person until 2030).
There are several types of ISAs:
A cash ISA acts like a savings account with tax-free interest on your annual allowance of £20,000.
A stocks and shares ISA allows you to invest in stocks, bonds, funds, or other securities with tax-free growth.
The innovative finance ISA covers peer-to-peer lending investments, also with tax-free returns.
A lifetime ISA, for those aged 18 to 39, supports buying a first home or saving for retirement, offering a £4,000 annual limit and a 25% government bonus of up to £1,000 per year.
Seize the opportunity to shield your ISA returns from tax (and inflation) while it’s still an option.
Invest in (and for) your children
The junior ISA is a long-term, tax-free savings or investment account for children, opened and managed by parents or guardians. The money belongs to the child, who can access it at the age of 18.
The 2024/25 limit is £9,000, which can go into a cash Junior ISA, or a stocks and shares junior ISA. Anyone can contribute, and unused allowances don’t roll over.
It’s a good way to build a nest egg for a child.
The junior ISA does not contribute towards the parent or guardian’s annual allocation; it comes out of the child’s annual allotment.
Give to others:
Most gifts escape inheritance tax (IHT), provided you live beyond seven years after giving them. You can give up to £3,000 each year, tax-free. You can carry forward an unused allowance, but only for one year. Small gifts of £250 per person escape tax too, as do wedding or civil partnership gifts – £5,000 for your children, £2,500 for grandchildren, or £1,000 for others.
Pension management:
The government encourages retirement savings by offering pension tax relief, effectively adding money to your pension pot. The amount of relief is tied to your income tax rate, with basic-rate taxpayers and non-earners guaranteed 20%. Higher-rate taxpayers can claim up to 40%, and additional-rate taxpayers up to 45%.
Remember the pension allowance of £60,000 can be used in future years (up to 3) but if your income is higher this year, it’s a tax-efficient form of investing for retirement.
Gaps in your NI record, due to career breaks or living abroad, can be filled by paying in, with current rates around £17.45 weekly. You can fill gaps from the last six years, with a deadline of 5 April each year annually.
Check your NI record on GOV.UK.
Make sacrifices:
Salary sacrifice is an arrangement where an employee chooses to reduce their salary for non-cash benefits to bring them into a lower tax bracket.
For example, contributing to a workplace pension via salary sacrifice means that part of your pension contribution comes from your pre-tax income, effectively giving you tax relief and NI savings.
Other benefits offered through salary sacrifice include childcare vouchers, cycle-to-work schemes, and electric car schemes, often exempt from income tax and NI.
Capital gains tax:
In October, Chancellor Reeves’ Autumn Budget hiked CGT rates on assets (excluding residential property) to 18% or 24%, depending on income and gain size, affecting those selling investments or property that have increased significantly in value.
The CGT tax-free allowance is £3,000. CGT is payable on property aside from your main home and cars, so primarily affects higher earners.
Unused CGT allowances don’t roll over, which is why the timing of asset sales needs to be strategic across tax years to maximise them.
For assets owned by spouses, utilise your individual CGT allowances strategically, which doubles the tax-free profit to £6,000. Transferring assets between spouses also incurs no CGT.
Married?
Marriage allowance allows a lower-earning spouse or civil partner to transfer £1,260 of their personal allowance to their higher-earning partner, which reduces the latter’s tax liability. To benefit as a couple, the lower earner must have income below their personal allowance, while the higher earner must be a basic-rate taxpayer.
The benefit is a reduction in the higher earner’s tax by 20% of the transferred amount, potentially saving £252 in the 2024/25 tax year. Claims can be backdated for up to four tax years, offering a potential rebate.
Time is ticking on the fiscal year. By proactively managing these opportunities, you can safeguard your assets and ensure a more financially secure future. Don’t allow these valuable allowances to slip away.
Business Expenses?
If you’re a sole trader or landlord, perhaps you could look at investing in business related expenses strategically. Bring forward repairs and maintenance if your income is high this year, or delay them if next year’s tax bill will be higher.
For those unsure of how to best proceed when it comes to managing their finances before the end of the year, it is advisable to seek advice from experts. However, for those who cannot afford high fees of traditional accountants, Taxd offers a low-cost, quick solution supported by expertise and technology.
