Your annual tax allowances: use them or lose them

Many of us will have made New Year’s resolutions about diet and fitness. But what about our financial health?

Our latest Money and Mind report revealed that 64 percent of respondents are concerned or very concerned about their finances. And 87 percent of these said their mental wellbeing is impacted by their financial circumstances.

This is perhaps unsurprising, as we’ve been going through a cost-of-living crisis. At Schroders Personal Wealth we are great believers in the power of a financial plan. A plan won’t remove the higher cost of living, but it can help you feel more in control of your finances. And it could help to reduce your money worries, no matter what your financial situation is.

A key part of financial planning is knowing what tax allowances are available to you, and that you have used these where possible. After all, if you don’t use them, you lose them.

This article covers some of the most important personal tax allowances. Why not make a New Year’s resolution to see if you could benefit from them?

Save or invest in an ISA

An ISA (Individual Savings Account) is a tax-efficient savings or investment vehicle. Savings or investments held inside an ISA wrapper are free of income tax and capital gains tax (CGT). UK adults have a £20,000 ISA allowance for each tax year. You may want to consider making as much use of this allowance as you can by the tax year end of 5 April.

Tell a spouse or partner

Your spouse or partner, if you have one, will have their own separate ISA allowance. So you could potentially invest a combined £40,000 a year tax-efficiently.

Use your Capital Gains Tax allowance

Capital Gains Tax (CGT) is a tax on the profit (the ‘capital gain’) made from a possession that has increased in value, typically when it is sold. Examples of possessions that incur CGT include: property other than your main residence, investments not held in tax-efficient schemes such as ISAs or pensions, and valuable possessions worth £6,000 or more (excluding cars).

But you only have to pay CGT on profits above your tax-free allowance, which is currently £6,000. So in the current tax year you could sell a possession and, if your gain on it was £6,000 or less, then you would not be liable for tax (assuming it was the only possession sold in the current tax year). However the CGT allowance will fall to £3,000 from April 2024.

Make a tax-free gift

You can gift up to £3,000 a year tax free. This £3,000 annual gifting exemption is per person and you are also able to gift from the previous year’s allowance if unused. Not only could your gift help others, but it would also no longer be included in the value of your estate, and so wouldn’t be liable for inheritance tax.

Contribute to children’s Junior ISAs

You could contribute up to £9,000 a year to children’s Junior ISAs (JISAs). Only parents or legal guardians can open JISAs for children aged below 16, but anyone can pay into them. If you have children, then you may be pleased to know their £9,000 annual JISA allowances would be separate from your own personal ISA allowance. One thing to note: JISA investments belong to the children themselves. But they can’t access these investments until age 18, at which point they are free to withdraw the funds in entirety if they wish.

Top up your pension

Employees or self-employed people could try to make the most of their £60,000 annual pension allowance, while non-earners could try to benefit from their £3,600 annual pension allowance. You could also see if you could utilise ‘carry forward’ rules, which let you make pension contributions for unused allowances you may have from the previous three tax years.

This article briefly covers some key tax allowances. To find out more you might like to turn to our more detailed review of what is available to you.

At SPW one of our principles is to have regular reviews with a financial adviser. This can help ensure you make the most of your tax allowances and, where appropriate, use them before you lose them.