6 last-minute wins before tax allowances reset

The end of the tax year is a good opportunity for savers and investors to carefully consider the tax efficiency of their investments, to ensure they don’t miss out on valuable tax-free allowances. This year has important reasons to consider maximising allowances to help you reduce your overall tax burden:

• Most personal tax allowances have been shoved in the deep freeze until 2028 and the Government is sticking to its plan to halve the annual capital gains and dividend allowances in the new tax year
• The personal savings allowance has remained the same since 2016 and when you consider the recent spate of higher interest rates this puts more people at risk of paying tax on the interest they earn on their savings
• According to the Office of Budget Responsibility, 1.7 million more people are set to be subject to higher or additional rates of tax this tax year

With the clock ticking down until the allowance reset button is pushed at midnight on 5 April, here is a checklist of six tax-efficient wins you can achieve before this tax year ends.   

1. Max out this year’s £20,000 tax-free ISA allowance

Savers can shelter interest, dividends and capital gains from tax in an Individual Savings Account (ISA). Money can be added as cash or investments until the £20,000 allowance resets on 6 April – this cannot be backdated. 

Remember, ISA rules are changing from 6 April to add some flexibilities, but they remain the same this tax year. The launch date of the additional £5,000 British ISA – unveiled by Chancellor Jeremy Hunt in the Spring Budget – is still unknown but may not arrive until the 2025/26 tax year.  

What do I need to do to make the most of my ISA allowance?

To take advantage of your existing £20,000 ISA allowance, you can open a new ISA or top up an existing account and fund it with as much as you can afford. It’s important to remember that cash ISAs can work well for short-term savings goals and investment ISAs are more suited for long-term savings targets with a time horizon of five years or more. 

Remember, investments carry risk, you may get back less than invested. 

Don’t panic if you need more time to make an investment selection. Simply store the money as cash this tax year and when you are ready drip feed it into the markets – even if it is next tax year.

Good to know – some platforms provide interest payments on cash balances. Bestinvest cash balances currently earn 4.45% (as of April 2024) so the money won’t sit idle while you take the time you need to select your investments. Our cash rate is set by our custodian (SEI investments) and is subject to change without notice. 

2. Reduce your income tax bill – top up your pension

Pension contributions not only boost your retirement income in the future but also reduce your income tax bill this year. The annual allowance and the most you can save into your pension pot this tax year is £60,000 gross, or 100% of your qualifying earnings (typically employment income as opposed to pension or property rental income).

Pension tax relief for different taxpayers

Taxpayer type	Pension tax relief
Basic rate	20%
Higher rate	40%
Additional rate	45%

This means for every £1,000 contributed into a pension the actual cost for the taxpayer after tax relief is £800 for basic rate; £600 for higher rate and just £550 for additional rate taxpayers.

This makes pension saving a tax-efficient way of saving money for retirement. This is made more pertinent by the extended freeze on the basic and higher rates of income tax until at least 2028 and the cut to the additional rate allowance at the start of the 2023/24 tax year – all of these have dragged millions more into higher tax bands.

With the risk that a future Labour government could target generous pension tax reliefs, those subject to the highest tax bands could consider maximising their pension contributions this tax year.  

Good to know – Pensions have the added benefit of ‘carry forward’ rules where savers can max out unused allowances from the previous three tax years once they have made full use of their current year allowance. A large bonus, for example, can be put to work in a pension, with a saver potentially able to make a gross pension contribution of up to £180,000 before the end of this tax year on 5 April. Find out more about pension carry forward – and the strict rules – before you decide.  

3. Don’t miss out on lucrative ‘interspousal transfers’ 

As people head towards much heavier personal tax bills, couples can maximise allowances by making use of two sets of personal savings allowance, dividend allowance and capital gains exemptions to reduce the overall amount of tax exposure for the family.    

Before transferring shares, funds or cash to your other half, remember they become the full, legal owner of the assets, so this is an unwise move if the relationship is on rocky ground.  

Some couples can ease their tax burden even more with marriage allowance

This is where a lower-earning partner – typically with an income below the £12,570 personal allowance – transfers up to £1,260 before the tax year ends to the higher-earning partner. This can reduce their tax bill by up to £252. Please note, however, this is only available for couples where neither is a higher rate taxpayer.    

4. Drop a tax band – and reduce national insurance payments – with salary sacrifice 

If you fear a pay rise or bonus will tip your income into a higher tax band, it could be worth investigating ‘salary sacrifice’. This is where some employers let their staff reduce their salary or bonus payments in lieu of increased pension contributions.  

As well as a reduction in income tax, both employee and employer will pay lower national insurance contributions (NIC) as a result, which makes pension saving even more tax efficient. Those close to the £50,270 earnings threshold where the higher 40% tax rate kicks in could dip under it by using salary sacrifice pension contributions.  

Make sure salary sacrifice works for your finances

Salary sacrifice can be especially helpful for those earning above £100,000. That’s because they have a unique tax challenge:

• They lose £1 from their annual personal allowance of £12,570 for every £2 of taxable income over £100,000
• The personal allowance is removed entirely once they hit the 45% additional rate threshold of £125,140
• This loss plus their 40% tax rate means these taxpayers effectively pay an eye-watering 60% income tax on that portion of their income

However, it’s vital to consider how agreeing to a lower salary could impact your ability to access credit, such as a mortgage. Plus, employee benefits such as life cover, and holiday, sickness and maternity pay may also be affected. It’s a good idea to ask your employer for a personalised calculation of how the scheme will affect your take-home pay and benefits before you commit. 

5. Don’t forget the kids – they have tax-free allowances too 

Children typically don’t pay tax, yet they still have tax allowances that can help parents build a pot of cash for their future. Remember, regular bank or building society accounts may work well for a child saving up for a new gadget or bike, but for bigger, longer term financial goals such as funding a gap year, university fees or even a first car or property deposit, a Junior ISA could be a better option.  

Junior ISA allowance is £9,000 this year

A child cannot manage the money themselves until they turn 16 and cannot access it until they are 18, when the entire Junior ISA converts into a tax-free adult ISA. At this point they could deposit the first £4,000 into a Lifetime ISA, which has very specific rules – the money must be used for a deposit on a first home (providing it costs less than £450,000) or for retirement after the age of 60. The benefit, however, is a 25% Government cash bonus (up to a maximum of £1,000 per year) on their contributions.  

Did you know there is a unique ISA loophole for 16–18-year-olds this year?

Children aged between 16 and 18 have a unique ISA loophole until the end of this tax year. Until midnight on 5 April 2024, they can contribute £9,000 to a Junior ISA and £20,000 to an adult cash ISA at the same time – giving them an ISA allowance of up to £29,000 in total – currently the largest allowance of all age groups.

Please note this loophole will close on 6 April when the minimum age to open a cash ISA rises to 18 from the current 16. 

Children’s pension allowance is £3,600 this year

A parent can invest up to £2,880 into a pension for a child, with the remainder of their annual allowance topped up with £720 from the government. A pension might not be something a child thanks you for now, but a sum of £2,880 invested every year into say a Junior SIPP could mean total contributions of £51,840 over 18 years, with tax relief of £12,960 topping that up to £64,800. Factor in investment growth and the value of the pot by retirement age is likely to be substantial. Remember, investments carry risk and you may get back less than invested.  

Good to know – when a child receives more than £100 in interest in their bank or building society account from money given to them by a parent, the parent is liable for tax on the interest if it exceeds their own personal savings allowance. The £100 limit does not apply to gifts given by grandparents or other relatives.    

6. Give a loved one a cash gift and reduce your inheritance tax (IHT) bill

Those that can afford to give money away to family members can take advantage of inheritance tax exemptions to avoid triggering a large IHT bill for their beneficiaries in the future. 

For now, however, the existing rules still apply with a nil rate band of £325,000 and an additional £175,000 residence nil rate band available where a main residence is left to direct descendants and the total value of an estate falls below £2 million.   

A cushion of up to £500,000 per person, or £1 million for a couple, might sound generous but increasing numbers of estates are becoming subject to IHT as property and share prices continue to rise while allowances remain frozen despite high inflation. 

Sums over this limit can potentially attract a 40% tax-charge payable by your beneficiaries, who may have already spent the money. Thankfully, exemptions outside the seven-year rule enable people to make financial gifts without saddling their beneficiaries with a big IHT bill.

These include:   

• The £3,000 rule – up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one tax-year which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities. For a couple, those figures double, with up to £6,000 per couple per tax year and up to £12,000 if the allowance is carried forward for a year  
• The small gift allowance rule – this means multiple cash sums of up to £250 per recipient can be given without affecting an IHT liability 
• The gifts from surplus income rule – people can give away as much money as they want, as long it comes out of their regular income, such as employment or pension income rather than capital. This is on condition the person giving the financial gift can afford to give it after their usual outgoings   
• The wedding gift rule – parents can give £5,000 to a child, while grandparents can gift £2,500 to a grandchild to help cover wedding expenses

Good to know – parents or grandparents looking to give loved ones financial support can gift top up money to ISAs, Junior ISAs, Lifetime ISAs, pensions – including pensions for children – to help their family members grow their wealth in a tax-efficient way.   

How Bestinvest can help 

Get your last-minute tax queries answered until midnight on 5 April – just call our friendly team on 020 7189 9999.

Looking for a tax-efficient account that costs less than you think? Tiered service fees for our easy to manage ISA and SIPP accounts are capped at 0.4% if you want to manage your own investments. Or you can choose one of our Ready-made Portfolios and get reduced service fees of 0.2%. Other fees can apply – have a look at our full list of fees and charges for details.

Our range of risk-rated Ready-made Portfolios are built and managed by the experienced investment experts at our parent company, Evelyn Partners, the UK’s leading integrated wealth management and professional services firm. They also manage over £59 billion of other people’s money (as of 31 December, 2023).

And if you would like extra guidance for your investment plans and goals, it’s easy to arrange a free coaching session with one of our financial planners.

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