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March 17, 2023

Spring into action for a new tax year

April is nearly here.

Brighter mornings, flowers in bloom, birdsong, maybe some better weather (after the snow!)?

…And, of course, the beginning of another financial year.

But we’ll get to that in a minute, let’s look at those positive spring days first.

Psychologists and doctors have highlighted the very real benefits we get from something as simple as the clock’s going forward. Those extra hours of sunlight stimulate your brain to produce more serotonin – the ‘happiness’ hormone. While winter is a time for hunkering down, spring is all about optimism and renewal.

And in many ways, we can apply this to the start of the next tax year. April is a clean slate, your tax allowances are re-set , and you’re free to start investing again for another 12 months.

That said, there are some things to consider before we get there. Some tax-free allowances can’t be carried over, it’s often a case of ‘use it or lose it’. That’s why everyone should have a tax year end checklist. Now is the time to spring into action:

Top up your ISA

Putting your money in an ISA (individual savings account) is generally one of the more tax-efficient ways of allocating your savings. You can put in up to £20,000 a year without having to pay tax on income, capital gains, or interest on cash.

There are several different types: cash ISAs, which are a basic tax-free savings account; stocks and shares ISAs, which let you put your money into a range of different investment products such as equities and bonds; and lifetime ISAs available to you if you’re aged 18 – 40 and used to put towards a first home or retirement (the government pays in a bonus of up to £1,000 on top of any qualifying contribution made within the corresponding tax year).

You can pay into one ISA or spread across a number of them, but that £20,000 limit can’t be carried into the next financial year. That means it’s crucial to top up your ISA before the start of April if you’re trying to minimise your tax liabilities.

Children’s investments

There are a range of options available to put money aside for children or grandchildren.

These include Junior ISAs, which allow their money to grow tax free and which they can withdraw once they turn 18 (also tax free). Meanwhile, a Junior SIPP, lets you start a fund for their retirement (including a 20% government top up).

You can make a pension contribution of up to £3,600 for each child or grandchild and anyone can contribute – parents, grandparents, aunties and uncles (as long as the annual threshold is not breached). The subscription allowance for Junior ISAs is up to £9,000 each. Again, this limit can’t be carried forward into the next year. So again, you ‘use it or lose it’.

Gifts

Another important area for savers is avoiding creating an unnecessary inheritance tax (IHT) for their loved ones. This is where you can take up your annual gift exemption.

Your annual “gift allowance” means that you can gift up to £3,000 per tax year, which is then considered to be immediately outside of your estate for future potential inheritance tax calculation purposes.

Unlike other annual allowances we have covered, if you have any remaining gifting allowance from last tax year, this can be “carried forward” to be used this year. However, you can only carry forward unused gift allowances over one tax year – so in this instance it is more a case of “use it (soonish) or lose it!

You can also make other gifts (such as Christmas and birthdays) outside normal expenditure allowances. Under the IHT rules you’re allowed to give as many gifts of up to £250 per person each tax year, as long as you haven’t used another allowance on the same person. You can also give a tax-free gift to someone getting married or starting a civil partnership (up to £5,000 to a child, £2,500 for a grandchild or great grandchild, and £1,000 to someone else).

Capital Gains Tax

The tax that many are talking about for the 2023/24 financial year is capital gains tax (CGT). The threshold for this is being cut considerably from April. The tax-free exemption limit is falling from £12,300 to just £6,000 for the tax year 23/24 and will be halved again to £3,000 the year after.

We’ll be writing more about this in the future, but it’s important to be aware of these changes now. They mean you’re more likely to be liable for CGT (paid on the profits when you sell assets like a second home or investments) in future years.

Watch this space for more from us on this subject or get in touch to chat.

For now, our advice is to: make full use of your ISA allowances where possible, to consider the timing of your intention to sell assets with a capital gain and consider whether the asset be transferred into a spouse’s or civil partner’s name (who may have a lower income tax bracket and/or unused CGT allowances)?

Watch this space for more from us on this subject, or get in touch to chat.

Unused personal allowances

For those over the age of 55 with a personal pension and with unused income tax allowances for the current tax year and money held in personal pensions, a tax-efficient withdrawal might be worth considering.

In most cases, from the age of 55 you can draw up to 25% of your personal pension tax free, with withdrawals from the residual 75% being treated as “earned income” for potential income tax purposes.

Therefore those with unused personal allowances could make a withdrawal of capital that would otherwise be liable to income tax, to take your total earned income for the year up to the personal allowance threshold.

In certain cases, it can be worth considering taking more than you need in the tax year to make use of your income tax and CGT exemptions. However, we’d advise not exploring this route without speaking to us first, particularly if these are ‘unnecessary’ withdrawals, or you’re already cash rich.

A new dawn, a new day

Back briefly to that theme of springtime optimism.

On 6 April, the first day of the new tax year, the sun will rise at 6.31am and set at 8.01pm. That’s more than 13 hours of daylight, so hopefully plenty of sunshine to get the serotonin flowing.

The clock on tax allowances and investing is reset, with your tax checklist complete and a fresh 12 months ahead, let’s be hopeful for much brighter days in the next financial year.

March 17, 2023