Tax Year End: Your Important Checklist

We are nearing the end of the tax year and now is the perfect time to take a closer look at your finances and ensure that you are utilising your various allowances to their full potential. The utilisation of allowances may be more important now than ever with the new Labour government increasing capital gains tax, and simultaneously freezing income tax thresholds until 2028. 

Speaking of the latter, in the April 2021 budget it was announced that income tax thresholds will be frozen until 2026, and the new Chancellor Rachel Reeves has extended this freeze to 2028. Why does this matter? Inflation and rising incomes are pushing more and more individuals into higher tax brackets, and so the government is able to increase their revenue without having to increase tax rates themselves. This process is known as fiscal drag, as more people are dragged into paying higher taxes over time.  

In addition to this, we have seen changes to the capital gains tax structure over the years. We have seen that capital gains tax allowances have decreased over time. In the tax year 2022/23 the allowance stood at £12,300, and has been incrementally reduced to £6,000 in 2023/24 and £3,000 in the current tax year 2024/25. Most recently, the new government has increased capital gains tax rates across the board. In relation to investments, for basic rate taxpayers capital gains tax has increased from 10% to 18%, and for higher and additional rate taxpayers this has increased from 20% to 24%. 

The impact that both fiscal drag and increasing capital gains tax rates has on the individual, increases the importance of leveraging tax efficient investment vehicles. Various products can be used to reduce your tax burden and grow your wealth to ensure that your money is working for you the best it can. 

Utilising your ISA Allowance

The ISA is an invaluable tool when it comes to reducing tax on your savings. Each person is able to contribute up to £20,000 per tax year across ISAs and benefit from paying no tax on the growth or income received. 

When the tax year ends on the 5th of April, each individual’s £20,000 ISA allowance resets, and cannot be rolled over into another tax year. So, in effect, you have £20,000 each year to allocate to ISA investments on a use-it-or-lose-it basis, and so maximising your ISA allowance to your potential each year is crucial to increasing tax free savings. 

You are able to spread your ISA allowance across multiple different types of ISA in the same tax year. By way of example, you can contribute £10,000 to a Stocks and Shares ISA and £10,000 to a Cash ISA within a singular tax year. 

Give your children an early advantage 

Your children can also benefit from tax free growth through the use of Junior ISAs. There is a separate JISA allowance available if you have been thinking about saving for your children’s future. Each child has a JISA allowance of £9,000 which is completely separate to your own ISA allowance. It is important to note that once funds enter a JISA, they are locked in until the child turns 18. Once your child turns 18 the JISA will be converted to an ISA in the child’s name, and they will be the owner of this investment moving forward. 

The JISA must be opened by the child’s parent or legal guardian, however anyone is able to contribute into the JISA for the child. So if you are wanting to save for a grandchild or even godchild’s future, the JISA can be an effective tool to plan for a young person’s future. 

Reducing taxable income through pension contributions 

Pensions can be another valuable vehicle for tax efficient savings. Personal contributions made into pension benefit from tax relief from the government. For each personal contribution made into a pension you receive a tax relief of 20% automatically, and if you are a higher and additional rate tax payer you can claim a further 20% & 25% relief from the government. By way of example, for every £80 you pay into your pension you will see £100 appear. So by contributing to your pension you could effectively be reclaiming £20 income tax already paid, and if you are a higher or additional rate tax payer you can claim a further £20 or £25 in your self assessment at the end of the year. 

To streamline processes you could establish a salary sacrifice arrangement with your employer into your workplace or personal pension. In this setup, a portion of your gross salary is contributed to your pension before tax is deducted. Through this method you could reduce your income tax liability while also decreasing the amount of national insurance contributions that you pay. 

In addition to this any funds held within the pension benefit from tax-free growth over the years, allowing your investments to grow more quickly than they would be held outside of a tax wrapper. So by contributing to your pension you can reduce the impacts of fiscal drag over the years through reducing your taxable income and benefit from tax-free growth on your investments. Ultimately allowing you to reach your long-term retirement goals sooner.

To make things better the pension allowance and rules are very generous. Each person has a pension allowance of £60,000 per year, or alternatively your pre-tax income, whichever is lower. By way of example, if you are earning £70,000 a year pre-tax your pension allowance is £60,000 for the year, whereas if you are earning £30,000 a year pre-tax, the maximum you can contribute to a pension is £30,000. It is important to consider that your pension allowance is inclusive of any tax relief added at source. 

There is a tapered annual allowance for anyone who is a higher earner. If your adjusted income exceeds £260,000 your annual allowance is reduced by £1 for every £2 your income is above this threshold. This taper will only apply if your threshold income is above £200,00. The maximum that one’s allowance can be tapered down to is £10,000. 

Pension Carry Forward

Unlike the ISA, with pensions one is able to carry forward any unused pension allowance from the previous three tax years. In order to carry forward pension allowance however, certain conditions must be met: 

• You must have utilised your full annual allowance for this tax year.
• You must be earning the amount that you wish to contribute in this tax year. So if you are earning £80,000 in the current tax year, you are limited to contributing only £80,000 into the pension this tax year using carry forward allowances.
• You must have had a pension open in the previous tax years.
• You must use the unused allowance from the most recent tax year first before using unused allowance from any other.

It is important to acknowledge that the annual allowance has not always been £60,000. The allowance was changed in the tax year 2023/24 from £40,000 to £60,000. So when looking back at the previous 3 tax years prior to the one we are in, the allowances were as follows: 

• 2023/24 – £60,000
• 2022/23 – £40,000
• 2021/22 – £40,000 

Now is the time to take stock of your current financial position 

As mentioned above, taxes are increasing outside of tax free wrappers, so it is more important than ever to utilise your ISA, JISA and pension allowances where you can to reduce the impact of fiscal drag and grow your wealth in a tax free environment. As the 5th of April nears, it’s key to take a proactive approach in reviewing your finances and maximising the allowances available to you. 

If you have any questions about allowances, carry forward or which investment product is right for you, we highly recommend booking an appointment with one of our Investment Consultants here.