Tax year-end: how can I make the most of my tax allowances?

At a glance

• Chancellor Jeremy Hunt announced several tax changes from the 2023/4 tax year, including reductions in capital gains and dividend allowances.
• It’s important to make the most of pensions and ISAs, as well as gifting allowances.
• Speak to us and we can help your money to work as tax-efficiently as possible, which will help keep your financial goals on track.

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It’s always a good idea to take advantage of your annual tax reliefs and allowances wherever you can. Not only does it mean that you don’t pay more tax than necessary, it also helps to improve your investment outcomes and makes it easier to achieve your financial goals.

This year, though, it’s more important than ever. In his first Autumn Statement, Chancellor Jeremy Hunt announced reductions to a number of key allowances used by investors, as part of his attempts to shore up the nation’s finances.

The message is use them or lose them.

Here, you can find out what you need to do before the end of the tax year (5 April 2023) and how we can help.

What is the Capital Gains Tax allowance?

The Capital Gains Tax (CGT) allowance for the current tax year (2022/23) is £12,300. This means that when you sell investments, you can enjoy gains up to £12,300 before you pay CGT.

But following the Chancellor’s announcement in the Autumn Statement, from 6 April 2023, the CGT allowance will be more than halved to £6,000, before it halves again in 2024/25 to just £3,000 a year.

The current rates for CGT are 10% for basic-rate taxpayers and 20% if you pay the higher or additional rate (18% and 28% for residential-property sales).

How do I mitigate the Impact of recent tax changes?

There are a number of steps that investors can take to mitigate a CGT bill, including selling off assets over several tax years and taking advantage of their spouse’s allowance.

However, with such significant reductions to the allowance looming, investors with assets to sell should check in with us and start planning ahead.

Dividend allowance changes

The Chancellor also set his sights on the dividend allowance. This is the amount you can earn from company dividends before Dividend Tax is charged.

Dividend Tax is charged on dividends you earn on company shares, including dividends from money held in collective investments such as funds and investment trusts.

Currently, the dividend allowance is £2,000, but from 2023 it will be halved to £1,000 and then halved again to £500 in 2024/25.

The Dividend Tax rate is 39.35% for additional-rate taxpayers, 33.75% for higher-rate taxpayers or 8.75% if you pay basic-rate tax.

Use your allowances

You can shelter your investments from Dividend Tax and CGT by holding them in tax-efficient wrappers, such as a pension or Stocks & Shares ISA.

Each year, you can pay up to £20,000 into an ISA or if you can tie it up until age 55 (57 from 2028), you can save into a pension. What is the pensions allowance? Currently, it’s £40,000 annually, or 100% of your income if you earn less than that.

If you’ve already fully funded your ISA or pension, it’s worth talking to us for other ideas. You could consider a pension for a spouse, child or grandchild, or explore ISAs for your family. A Junior ISA can be a tax-effective way of saving a lump sum for the children in your life. Junior ISAs have a lower allowance of £9,000 a year (2022/23).

It's sensible to think about where you hold your cash savings, too. While Cash ISAs are available, the Personal Savings Allowance lets basic-rate taxpayers earn £1,000 in savings interest tax free and higher-rate taxpayers can earn up to £500 in interest before they need to worry about tax. This means that depending on your circumstances, you may be better off preserving your ISA allowance for stocks and shares.

How much money can be legally efficiently given to a family member as a gift?

If your beneficiaries will likely pay Inheritance Tax (IHT) when you die, you may also want to think about using your gifting allowances.

Each year, you can give away £3,000 tax free (or £6,000 between couples) free of inheritance tax.

There are also separate allowances for wedding gifts to family members, but they aren’t annual.

Use it or lose it

The majority of allowances work on an annual basis. That means if you don’t use an allowance before 5 April, you lose it.

Two notable exceptions are pensions and the IHT gifting allowance. Carry-forward rules enable you to use any unused pension allowances from the past three years, while any unused IHT gifting allowance from the previous year can be used. This means a couple gifting for the first time could legally gift £12,000 tax free to their family.

The value of advice

Talk to us throughout the year – and not just at the end of the tax year – and we can make sure you take advantage of reliefs and allowances wherever you can.

In addition to making more of your wealth, this can also have a priceless impact on your financial wellbeing, sparing you the worry around paying too much tax or breaching rules and not paying enough.

Tax-year-end planning shouldn’t be a rush, but with key allowances being reduced over the coming years, it might be worth checking in with us to find out if you can mitigate their impact by planning ahead now.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that Cash ISAs are not available through St. James's Place.

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