With the tax year ending on April 5 2025, now is the time to ensure you’re making full use of your annual allowances.
Some tax allowances were reduced in the 2024/25 tax year and are set to decrease further. By reviewing your financial position before the deadline, you can take advantage of the current allowances available to help grow your wealth.
Here are some quick wins you could consider ahead of the tax year end.
Maximise your ISA allowance
Any unused allowance can’t be carried forward into the next tax year – it’s a case of use it or lose it. An ISA effectively shelters your investments or savings from tax. You pay no Income Tax on the interest or dividends you earn within an ISA, and any profits from investments are free of Capital Gains Tax (CGT).
The ISA has long been a pillar of long-term financial planning thanks to its valuable tax advantages. You don’t need to include ISA investments on your tax return, which can make managing your finances easier, and allows you to make investment choices based solely on their potential, with no need to factor in any tax implications.
Making regular annual contributions can really add up. The highly coveted status of being an ISA millionaire belongs to nearly 5,000 people in the UK at the last count.* Remember, investments in an ISA can go up and down and you may get back less than invested.
How and where can I use the allowance?
You can save or invest up to £20,000 in total for the current tax year. Your annual allowance for the 2024/25 tax year will expire at midnight on April 5 2025.
The money can be invested across eligible ISAs, for example cash, stocks and shares and Lifetime ISAs. There are no limits to the number of ISAs you can have, provided you don’t exceed the overall annual allowance.
Stocks and shares ISAs could deliver a higher return over the longer term than cash ISAs. However, there is a risk the value of your investments could fall – especially in the short term.
A Lifetime ISA, which can form up to £4,000 of the £20,000 ISA allowance, is available to people aged between 18 and 40 who are saving for retirement or a house deposit. The government will add a 25% bonus to contributions, up to £1,000 each year. You can continue to make contributions into a Lifetime ISA up to the age of 50.
For those wanting to give their children a head start, Junior ISAs are a popular way for friends and family and build up tax-free savings and investments, with an annual investment limit of £9,000 per child. Withdrawals are possible from when the child turns 18.
It’s up to you how you choose to make use of your allowance. If you have funds available, a lump-sum deposit is a quick and easy way to maximise your allowance. Alternatively, setting up a recurring payment can help you build towards the full amount. If you have ISAs with multiple providers, transferring them can simplify your finances and ensure you’re making the most of your allowance.
Inheritance tax: The gift of giving
It’s well worth your while putting time and effort into planning how you can protect your family’s financial future. One of the easiest ways to reduce the size of your estate, and a potential Inheritance Tax bill, is to gift money to others.
Each year, you have an allowance that’s immediately exempt from Inheritance Tax of up to £3,000. You can gift this money to anyone and in any way. You can also give any number of gifts of up to £250 to anybody you like unless they’ve already received part of your annual £3,000 allowance.
Gifts are anything of value that you give to someone else. They include cash, personal goods such as jewellery, household items, property or land and stocks and shares. A gift could also be the difference in price if you sell something for less than it’s worth. For example, if you sell your car to your grandchild for half its value, the market value of the car would be considered the value of the gift – not the price at which you sold it to them.
Use your CGT allowance
Capital Gains Tax – the tax you pay when you realise a profitable investment – is a key consideration for tax planning. You can make tax-free gains of up to £3,000 in the current tax year. This allowance cannot be carried forward into the next tax year, and it’s important to make the most of it.
Transferring assets between spouses enables you to use both annual CGT exemptions. Unused losses from previous tax years can also be offset against gains to reduce your CGT bill, and investments held within a pension, or within an ISA, are also exempt from the CGT.
For gains made before 30 October 2024, basic-rate taxpayers pay CGT at 10%, or 18% if the gains are from residential property. Higher and additional-rate taxpayers will pay CGT at 20% and 24%, respectively. For gains made after 30 October 2024, basic-rate taxpayers pay CGT at 18%, while higher and additional-rate taxpayers pay CGT at 24%.
Power up your pension
A pension is an investment just like any other and is probably one of the biggest pieces of your own financial jigsaw.
The UK’s tax system allows you to contribute some or all of your earned income into a pension and benefit from tax relief, potentially reducing your taxable income to zero in some cases. Additionally, your employer may contribute to your pension, further boosting your retirement savings. Checking your pension contributions before the tax year ends could help you identify opportunities to increase savings and maximise tax advantages.
Every taxpayer under the age of 75 gets tax relief of 20% within their annual allowance. For those earning more than the higher rate tax band of £50,270, you can claim even more back with higher-rate and additional-rate pension tax relief.
Higher-rate taxpayers can claim an extra 20% tax relief on earnings they pay 40% tax on, totalling up to 40% in pension tax relief. So £10,000 of pension contributions could cost as little as £6,000.
Additional-rate taxpayers can claim an 25% extra tax relief on earnings they pay 45% tax on, totalling up to 45% in pension tax relief. This means £10,000 of pension contributions could cost as little as £5,500.
The maximum tax-free amount you can save into a pension each tax year is either £60,000 or 100% of your earnings – whichever is lower. But for higher earners, your pension annual allowance may be smaller.
If your threshold income is more than £200,000 and your adjusted income is more than £260,000, your annual allowance for that tax year will be tapered. A tapered allowance reduces proportionally according to your earnings – for every £2 of adjusted income over £260,000, your annual allowance will decrease by £1. The minimum tapered annual allowance in the current tax year is £10,000.
This annual allowance applies to both your personal and workplace pension contributions and if you breach the allowance, you’ll be liable to pay tax charges.
It’s important to note that if you’re not working but are under age 75, you are still able to contribute to a pension and receive income tax relief. You can pay up to £2,880 each tax year into a pension, boosted by tax relief to £3,600.
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If you have any questions or wish to explore your options, reach out to us. Our team of experts is ready to assist you. please don’t hesitate to contact us on 0333 241 3350 or email info@richmondhousewm.co.uk
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