Consultants’ Corner: Why 5 April is more important this year than usual

As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.

By Chris Rudden, CFA, Head of UK Investment Consultants

It’s that time of year again: the end of the tax year. 5 April, is a crucial date in the calendar for personal finances for many reasons, but crucially because it is the deadline that you have to use the allowance of the various tax wrappers that you have available to you.

But this year, for various reasons, it is even more important than usual.

Rates are high, markets buoyant

You have an allowance of how much you can make in interest (personal savings allowance), dividends and capital gains before you pay any tax each year – the three main sources of returns on your savings.

These are going down next year, which we’ll touch on later.

The numbers for these are dependent on your financial situation, but can be up to:

• Personal savings allowance – £1,000
• Capital gains – £6,000
• Dividend allowance – £2,000

I’ll focus mostly on the personal savings allowance to make my point. When interest rates were below 1%, your cash, money market product (Liquidity+) and any other bonds would probably have been giving you something like 0.5% per year.

So you would have needed a portfolio of over £200,000 to yield enough interest to go over the allowance.

However, rates are now much higher. Our Liquidity+ offering is yielding around 5.3% gross per year*, for example (at the time of writing), and many bonds are yielding even higher. Cash savings are also experiencing higher yields.

So with standard rates of return going from 0.5% to 5%, the amount that would generate a taxable yield goes from £200,000 to £20,000. So suddenly the prospect of paying tax on those savings becomes a lot more real for a lot more people.

A similar point can be made for the investment holdings as well. After a really positive year in 2023, our expected return calculations (soon to be circulated in our strategic asset allocation) continue to be really strong. 

So whilst it’s great that we’re in an environment that’s great for people planning and saving for their future, Jeremy Hunt (again, at the time of writing) will be licking his lips at the tax windfall coming.

Tax-free allowances are falling again in the 2024/25 tax year

We touched on the tax-free allowances that people have in the section above, but another crucial factor is that these are coming down again in the next tax year.

The big one is the capital gains tax allowance. Previously (in the last tax year), you could make £12,300 of capital gains per year before you started paying any tax. However, in this tax year, this has been cut to £6,000. After 6 April, this will become £3,000.

If we look at our most populated portfolio, level 5, in 2023 – it had a return of 10.3% (Moneyfarm research*). Previously, under the old allowance, you would have to have a pot of around £120,000 to start paying tax on that return. This year that size of pot has more than halved to roughly £58,252. Next year, that will fall again to £29,126.

So again, these smaller allowances have meant that paying capital gains tax outside of an ISA, pension or JISA wrapper becomes a very real prospect for a pot that is a quarter of the size previously.

This is looking just at 1-year performance as well, admittedly a strong one, but the idea of such investments is that you have them for many years, 5 to 10+. So if we look at the level 5 portfolio again, but since we launched it in 2016 – so a 7-year period (up until the end of last year), the return has been 56.7%. 

So to have that return, but to stay under the £3,000 capital gains tax threshold, you could only have a starting investment pot of £5,291 or less. 

The key point is that paying capital gains tax will previously not have been something that people would have been so conscious of, as the allowances have been pretty generous. However, that is no longer the case, and this is now a factor that is much more relevant for many more people.

Also if you were previously in a position where you were paying capital gains tax, you will have to now pay a lot more.

So again, it is even more crucial that you use all of the allowances that are available to you. Whether this is the £20,000 for the ISA, the £9,000 for the JISA or the (up to) £60,000 that you can put into a pension. Because this will allow you to keep far more of your returns and allow you to be much more effective in reaching your goals.

The allowance for the amount of dividends you can receive before paying tax is being cut in half next year from £2,000 to £1,000. So a similar story there.

Pension contribution allowances are higher this year than has previously been the case

The last key point about using the allowances is that for some people, at least, the pension allowance was actually increased in the last tax year. So where previously the maximum that you could contribute to your pension was £40,000, this has been increased to £60,000 – on the condition that your income matches or is above this level. 

So whilst this time of year is often referred to as ‘ISA season’ the pension is just as powerful a weapon to protect your future planning from tax, although there are other features to it. 

If you’d like to discuss your specific situation and further details about your pension, please book an appointment with our team, and they would be more than happy to help.

So here I have listed simply 3 areas, but I think they are really key. Every year it is important to make sure that you have used all of the tax wrappers available to you. Also, in most cases, if you don’t use the allowance before 5 April you lose it. So you can’t go back and retrospectively shelter the money and its growth.

So even if you feel like these thresholds apply to you, they certainly may do so in future. So use these gifts that you have available. There are very few, if any, drawbacks and a lot of potential benefits.

If you ‘d like to have a discussion with one of our friendly and trained consultants, to better understand the rules or how they apply to your situation, I would actively encourage you to book an appointment with us.

Chris Rudden, CFA, Head of UK Investment Consultants: Chris is passionate about blending technology and human expertise to help people make better investment decisions to secure their financial future. With a keen interest in the impact macro economics has on investments, Chris has been at Moneyfarm for over 7 years now and is a chartered financial analyst with the CFA society. 

*Performance shown is net of fees
**Performance period starts from 01/01/2017 and ends in 31/12/2023

Disclaimer: As with all investing, your capital is at risk. The value of investments will go down as well as up and you may get back less than you invested. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you are unsure about investing you should always speak with a financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.