ISAs: End of Tax Year Reminder

We are fast approaching the end of the 2023/24 tax year, are you fully aware of the various tax efficient allowances and pension tax reliefs that could be available to you?

This time of year presents an opportune moment to examine both your personal and business finances to ensure they are structured to optimise your tax efficiency. Despite the ongoing freeze on many tax rates and thresholds, numerous strategies remain for organising your financial matters tax-efficiently.

We’ve outlined some of the key areas in which you are able to make the most of tax-saving measures before the deadline arrives:

ISAs

• ISAs continue to be a great source of tax-efficient investment by offering tax-free income and gains. They also do not need to be declared on a tax return.
• Unlike some investment products, they also offer tax-free withdrawals and income with no penalty applied. This makes an ISA a very useful investment vehicle to achieve capital growth over the medium to long-term!
• The maximum permitted deposit is currently £20,000 per year and is set to remain the same for the 2024/25 tax year. However, the Transact platform ISA allows for any withdrawals or charges taken from the ISA wrapper over the tax year to be replaced before the 5^th April using the Flexi ISA rules.
• ISAs are also allowed to be transferred from Cash to Stocks & Shares (and vice versa) without use of your annual allowance should your circumstances require.
• With the capital gains allowances reducing for the 2024/25 tax year, utilising ISAs will ensure any capital gains within your investments are tax free.
• The Transact ISA account also allows instant access cash to be held (currently paying 4.88% AER) and fixed term deposits if you are looking to improve returns and tax efficiency on cash based investments.

Pensions

• Pensions, similar to ISAs, also offer a great source of tax-free growth as a way to save for your retirement in a tax-efficient manner. Deposits can either come as a personal payment or a payment from a company, both offering a variety of benefits.
• Personal contributions receive ‘Relief at Source’, an additional 20% payment from the government. They also extend the basic-rate threshold of income tax, which may reduce the amount of higher or additional rate tax that may be paid. If you are a higher earner (£100,000+), a personal contribution may reclaim a portion / the full value of your any lost or tapered Personal Allowance.
• Gross employer contributions can be paid to reduce the company’s tax liability as they are permitted as they are typically a legitimate business expense. They can also be paid without limit of salary up to a maximum of £60,000 pa as well potentially using Carry Forward from previous tax years.
• Pensions can also be used as an Inheritance Tax (IHT) vehicle as all funds held within a pension wrapper are removed from your estate.
• When you come to draw pension benefits, you can take up to 25% of the fund tax-free.
• Please note that any personal pension contributions will be restricted by your UK relevant earnings.

Considering ISAs for Children

If you have minor children, you or a relative can invest up to £9,000 per child in the current tax year into a Junior ISA. This allows the funds/ investments to grow tax efficiently, which could help with their further education or house deposit, as they will gain access and control of the funds when they turn 18 years old. Adult children could use gifts you make to them to invest in a Lifetime ISA and maximise the tax­efficient bonus available to them.

Capitalising on Dividend Income

When it comes to diversifying your investment income, have you considered the potential of dividends? This type of income can be particularly appealing as it’s taxed at a lower rate compared to other sources. Reviewing your anticipated tax exposure is essential to understand whether holding these investments within an Individual Savings Account (ISA}, equalising your holdings with your spouse or registered civil partner, or opting for an alternative investment would be more beneficial.

For those who own companies, evaluating if the low-salary/high-dividends strategy still offers the most tax-efficient approach is imperative. This strategy may not always be the most beneficial, and regular reviews are necessary to determine if there are more effective ways to draw funds from the company.

Mitigating the Risks of Income Tax Thresholds

Income Tax thresholds can significantly impact you, especially if your income level is just above the basic or higher rate Income Tax band thresholds. In such cases, mitigating the impact by claiming Income Tax relief on Gift Aid donations, pension contributions or tax­ efficient investments could be wise.

Examining Tapering Thresholds

The value of Income Tax relief becomes even more apparent if you find yourself within the tapering thresholds. These include the High Income Child Benefit Charge (£50,000 –
£60,000}, where Child Benefit is clawed back; the tax-free childcare threshold of £ 100,000
a year (where you lose the 25% government top-up if at least one parent earns more than £100,000); or the Personal Allowance threshold (£100,000- £125,140), where the Personal Allowance is reduced by £1 for every £2 over that threshold. If you exceed these thresholds, you could be subject to an effective tax rate of 60% or more.

Boosting Income with Personal Pension Contributions

Adding to your personal pension contributions can significantly boost your Income Tax relief. The gross contribution is what benefits your pension policy. However, it’s essential to tread carefully and avoid breaching the annual allowance, as this could invalidate the Income Tax relief on your excess pension contribution. As a reminder, reviewing any unused annual allowance for the 2020/21 tax year by 5 April 2024 is crucial, as any unutilised allowance will be lost after three tax years.

Leveraging your Inheritance Tax (IHT) Allowances

As part of your review of assets, projected income levels and needs, it’s important to consider whether gifting funds or assets to your children or grandchildren is appropriate. This could serve several purposes, such as supporting their education, helping them get on the property ladder or even reducing your own IHT exposure. Currently, IHT is payable at 40%, where a person’s assets on death and any gifts made during the seven preceding years total more than the nil rate band (NRB) and the residence nil rate band (RNRB).

The NRB is currently £325,000, and the RNRB is up to £175,000; these are fixed at this level until April 2028. Ensure you use the allowances available each year, such as the small gifts allowance of £250 or the annual IHT allowance of £3,000. Don’t forget about gifts on consideration of marriage (£5,000 to children, £2,500 to grandchildren and £1,000 to anyone else).

It’s important that if you are considering making a new ISA or Pension contributions that you consult with your adviser before doing so.

Who are Vizion Wealth?

Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.

All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.

DISCLAIMER:

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES, OF AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

“The information contained in this article is intended solely for information purposes only and does not constitute advice.  While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article”.