As our current tax year draws to a close, it is time again to ensure you are making the most of your allowances and getting the most from your savings. Over the last decade we have seen an increase in our taxes, most noticeably in Capital Gains Tax and Inheritance Tax as pensions are set to be liable to IHT from 2027.
ISA Allowance
The most commonly known but too often underused; your ISA (Individual Savings Account) allowance. You can contribute up to £20,000 to your ISA this tax year. This can be to either a cash ISA, where you can have a steady rate of interest on your savings or, if the money is for the longer-term, you can contribute to a Stocks and Shares ISA. Either way, the important thing is that you use the allowance now. If you’re not sure which ISA you should go for, don’t worry; once you have it inside the ISA wrapper, you can transfer it between other ISAs in proceeding tax years without it using a new allowance!
Pension
From April 2027, your pension will be subject to Inheritance Tax (IHT). This was the biggest change (at least for me and my clients!) from the Autumn budget delivered by the Labour Government last year. Very often the question now is “should I still be investing into a pension?”. The simple answer is yes. Our pensions are designed to provide us with an income in retirement.
For businesses owners, you can make contributions to a pension and you will receive Corporation Tax relief on those contributions.
For personal contributions, you will receive tax relief. To keep this simple, if you contribute £10,000, the tax relief will top-up your contribution to £12,500.
The current allowance for this tax year is £60,000 gross (£48,000 net for a personal contribution which gets you your £12,000 tax relief).
You can also go back to take advantage of unused annual allowance from previous tax years. I’d encourage you to contact me if you wish to discuss this.
Capital Gains Tax (CGT)
The Capital Gains Tax exemption (the amount of gains you can realise before you start to pay tax) is now just £3,000. It was only in 2023 that this was reduced from £12,300. Quite a shock to the system for anyone using this allowance to manage their investments.
For the majority of people, they will need to seek guidance in how they manage their investments which are exposed to CGT.
It is usual for us to utilise these assets to fulfill the pension and ISA allowances.
Gifting for Inheritance Tax Planning
There are also a number of allowances available each year where you can make small gifts to immediately reduce your Inheritance Tax liability. These include:
– You can gift £3,000 each tax year to anyone which will immediately reduce your Inheritance Tax liability by £1,200.
– You can gift up to £250 to as many people as you like, as long as you have not used another allowance on the same person.
– You can also make gifts for a wedding of up to £5,000 for your child, £2,500 for your grandchild or great-grandchild and up to £1,000 for any other person.
For married couples, you each have these allowances available to use.
Over time, these can add up and should be considered an important part of your financial planning.
If you make regular gifts out of your income this may also be immediately exempt for IHT, however there are complex rules around this and you should consult your tax adviser before setting up any regular payments.
I will be covering these allowances in more detail in a separate article shortly.