Nine ways to maximise your tax allowance

With the end of the tax year coming up on 5 April, Paul Clifton, director of wealth management at Arbuthnot Latham explains why maximising your tax allowance is important:

“Maximising your tax allowances is essential for several reasons. By making full use of your allowances, you can lower the amount of tax you owe, keeping more of your money in your pocket. Similarly, tax-efficient savings options like ISAs and pensions allow your investments to grow without being eroded by taxes, helping you build a more substantial financial ‘cushion’. 

Effective tax planning can enhance your overall financial strategy, enabling you to achieve your long-term financial goals more efficiently. Using allowances like junior individual savings accounts (ISAs) and making financial gifts can also provide financial security for your loved ones and reduce future inheritance-tax (IHT) liabilities.” 

Paul suggests nine ways to maximise your tax allowance:

1. Use your ISA allowance 

“You can invest up to £20,000 in ISAs this tax year. Gains within an ISA are free from capital gains tax (CGT), and no income tax is payable on interest or dividends.  

“If you're married or in a civil partnership, you can double your combined allowance to £40,000. Consider the 'bed and ISA' process to realise a capital gain and then reinvest within an ISA, but seek financial advice as this involves a short period out of the market. 

2. Boost your pension contributions 

“The maximum tax-relievable amount you can save into a pension each tax year is £60,000 or 100 per cent of your earnings, whichever is lower. High earners may have a reduced allowance. If you're not working and are under 75, you can still contribute up to £2,880 each tax year, boosted by tax relief to £3,600. 

3. Use your capital gains tax allowance 

“You can make tax-free gains of up to £3,000 this tax year. This allowance cannot be carried forward, so it's important to use it to reduce future CGT liabilities. Transferring assets between spouses can help use both annual CGT exemptions. 

4. Use your gift exemption 

“Consider using your annual gift exemptions and making larger gifts to reduce the value of your estate for inheritance tax (IHT) purposes. You can give away up to £3,000 each tax year without it being included in your estate for IHT purposes. You can also carry forward unused allowance from the previous tax year. 

“Additionally, you can give as many £250 gifts per person as you want, provided you haven't used your £3,000 exemption for the same person. Larger gifts may be exempt from IHT if you live for at least seven years after making them.  

5. Plan for charitable donations 

“Donations to charity can reduce your taxable income. Gift Aid allows charities to claim an extra 25p for every £1 you donate, and higher-rate taxpayers can claim additional tax relief. 

6. Review savings income 

“The personal savings allowance (PSA) allows basic-rate taxpayers to earn up to £1,000 in savings interest tax-free, and higher-rate taxpayers up to £500. Additional-rate taxpayers do not receive this allowance. 

7. Consider junior ISAs 

“Children are entitled to a junior ISA (JISA) allowance of £9,000 per year.  You could consider funding a JISA to provide your children with a nest egg when they turn 18. Like regular ISAs, gains within a JISA are free from CGT, and no income tax is payable on interest or dividends. 

8. Dividend allowance 

“The dividend allowance is £500 per year. Ensure you make use of this allowance, as it cannot be carried forward. Dividends are subject to lower tax rates compared to salary. 

9. Consider tax-incentivised investments 

“Investing in tax-incentivised schemes like the enterprise investment scheme (EIS) and venture- capital trusts (VCTs) can offer significant tax benefits while supporting early-stage businesses in the UK. 

“By investing in EIS-qualifying companies, you can receive 30 per cent income-tax relief on investments up to £1m per year (or £2m if investing in knowledge-intensive companies). Additionally, you can defer CGT if gains are reinvested into EIS-qualifying companies, and benefit from IHT exemption after holding the shares for at least two years. Loss relief is also available, allowing you to offset losses against your income or capital gains. 

“VCTs allow you to invest in a portfolio of small, growing UK businesses. You can receive 30 per cent income-tax relief on investments up to £200,000 per year, provided the shares are held for at least five years. Dividends from VCT shares are tax-free, and you are exempt from CGT on profits when selling your VCT shares.”

www.arbuthnotlatham.co.uk  

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