With the start of the new tax year comes new opportunities for planning.
At Informed Choice we recommend making the most of the various tax allowances as early as possible in the tax year. The main advantage of this is your funds will be invested for longer, meaning a greater potential for growth.
Another advantage is that there is no risk of missing the end of tax year deadlines by using your tax allowances early. Each platform sets their own cut-off dates each year and therefore by planning in advance there is no risk of missing these deadlines.
For the 2024/25 tax year there are a number of tax allowances which should be used where possible. The first is the Individual Savings Account (ISA) allowance.
For the 2024/25 tax year the ISA allowance is £20,000 per person. If affordable, using your ISA allowance each year is sensible as ISAs are a tax efficient way of investing.
You are not taxed on the gains that arise throughout the life of the investment and you can withdraw funds at any point tax-free. You are unable to carry forward unused ISA allowances and therefore, any remaining allowance at the end of the tax year will be lost.
Although the Government announced an additional £5,000 ISA allowance which can be invested in British assets only, this has not been implemented and so will not be available yet.
The annual allowance for pension contributions remains at £60,000 for the 2024/25 tax year, assuming that you are not subject to the tapered annual allowance or money purchase annual allowance which reduce your annual allowance to up to £10,000. You may also be able to carry forward any unused annual allowance from the previous three tax years.
Investors up to age 75 are entitled to invest up to the lower of the annual allowance or 100% of their pensionable earnings and receive tax relief at their highest marginal rate. If you do not have any pensionable earnings you are entitled to contribute up to £3,600 gross into your pension per annum.
We would usually recommend maximising your pension annual allowance where affordable as pensions are a tax efficient investment. The main advantage of investing into a pension is that contributions benefit from tax relief at your highest marginal rate of income tax.
Funds within the pension wrapper grow free of tax and up to 25% can usually be withdrawn tax-free. Pensions are also outside of your estate for inheritance tax purposes and so any amount invested into a pension will reduce your potential inheritance tax liability.
The capital gains tax allowance has reduced to £3,000 for the 2024/25 tax year. If you have investments which are liable to capital gains tax, for example a General Investment Account (GIA), it is important to utilise your capital gains tax allowance each year to reduce the overall gain on your account. This can be done by selling funds within the account.
Spouses can transfer funds to one another on a no gain, no loss basis to use both spouses’ capital gains tax allowance.
A GIA can be used to fund your pension and ISA allowance each year through a process known as a ‘Bed & ISA’ and ‘Bed & Pension’. In doing so, you are moving funds from a taxable environment within your GIA into your ISA and pension, increasing the level of tax-efficiency across your portfolio.
If you would like to discuss your options for utilising your tax allowances in the 2024/25 tax year, please contact your Financial Planner at Informed Choice.
