Tax Year End Planning

What is the tax year end and why is it important?

The 2023/24 tax year ends on the 5th April and the 2024/25 tax year starts on 6th April. These are key dates in the financial planning diary.

The 5th April is the deadline for many useful reliefs and allowances, which you may want to use from a tax efficiency point of view. Whereas the 6th April is also important because it’s the day the allowances reset.

For many clients you either want to make use of the allowance before they’re lost or use them as soon as they’re available. This can make March and April very busy planning months.

April is also important because it determines your personal income for the year and what tax bands you fall within. This again is important to understand, so that you can make the most of your tax planning.

What should I consider before the 5th April?

Top up your ISA – Every year you have an ISA allowance of £20,000 which can be used for a cash ISA and/or a stocks and shares ISA. This is an easy win because ISA savings benefit from tax-free growth and income. This is especially important now when cash interest rates of circa 4 to 5% are available and therefore cash in the bank can provide additional taxable income.

Top up your Lifetime ISA (LISA) – Every year you have a £4,000 allowance up to age 50, but the account must be opened before your 40th birthday. The Government provides a 25% bonus to your contribution (i.e. if you contribute £4,000, you will receive a £1,000 bonus), but the money must be used to either purchase your first home (restrictions apply, e.g. property price) or retirement planning from age 60. If the money is used for any other reasons, a penalty is applied.

If you contribute to a LISA, your standard ISA allowance is reduced. For example, if you contribute the maximum £4,000 to your LISA, you will be capped at £16,000 for your standard ISA. You can’t save more than £20,000 overall excluding the Government bonus.

Save for your children – You can save for your Children into a Junior ISA and have an allowance of £9,000 per tax year. This will provide a useful sum of money when the child turns age 18.

Pension planning – This is one of the most important allowances to use, as you benefit from tax relief on the contributions, any savings within a pension accrue free of income tax and capital gains tax and on withdrawal, you can receive 25% tax-free. In addition, generally any savings within a pension are outside your estate for inheritance tax.

You can contribute up to your ‘relevant earnings’ into a pension, capped at £60,000 for most people, although higher earners can see this limit reduced. If you have no ‘relevant earnings’ then you can still contribute £3,600. The ‘relevant earnings’ caveat does not apply to employer contributions. You may also be able to carry forward any unused allowance from the previous 3 years. Therefore, if you contribute now, you can use this year’s allowance and the earliest of the 3 years which is 2020/21. If you wait until 6th April 2024, the earliest year will be 2021/22 and a year’s allowance may be lost.

Pension contributions can also be useful to reinstate some benefits and allowances that are tapered by higher income. This could be the loss of Child Benefit when your income is above £50,000 and loss of your £12,570 personal allowance if your income is above £100,000.

Venture Capital Trust (VCT) – These investments are not suitable for everyone, due to their higher investment risk and lack of flexibility, but where appropriate, these plans do offer attractive tax relief. 30% tax relief can be claimed on contributions up to £200,000, meaning if you invested £10,000 in a VCT, your tax bill for the year will be reduced by £3,000. In addition, any growth or dividends are received tax-free. However, the investment does have to be held for at least 5 years or the tax relief will have to be repaid.

Capital Gains Allowance – is a key consideration, especially as from 6th April the CGT allowance is halving from £6,000 to £3,000. Therefore, if you have gains it might be better to realise the maximum within this year’s higher allowance.

Gifting and Estate Planning – Every tax year you can make gifts of £3,000 as an annual gift exemption and £250 which is a small gifts exemption. These exemptions are simple ways of potentially reducing your future estate and potentially limiting a future inheritance tax bill.

How can we help?

Taking financial advice can give you the peace of mind that all possible reliefs and allowances are maximised, so that you can make the best plans for your future.

Many of these areas are complex, particularly when considering different taxes and how they interact with one another, therefore you will need a bespoke plan for your situation.

If you would an initial consultation to discuss your current position and your future goals, please get in touch.

The above summary is not a personal recommendation and is not an exhaustive list of all options. You should take advice before proceeding with any of the options detailed, so that you are aware of the benefits and any potential downsides/ risks.

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