There are just a few weeks to go before the end of the tax year on April 5, which means you’ll need to get your skates on if you want to make the most of your tax allowances.
That can mean anything from using your annual individual savings account (ISA) allowance to paying more into your pension or Junior ISA, if you have children. Here are some easy ways to save tax and make your money work harder before the current tax year finishes on April 5.
- Make the most of your ISA allowance
- Top up your pension
- Can you use carry forward?
- Don’t leave your last drawdown payment too late
- Pay into a pension for a partner or child
- Make sure your child’s savings are tax efficient
- Could you ‘Bed and ISA’ other investments?
- Look at ways to reduce any potential Inheritance Tax liability
- Consider transferring assets to your spouse or civil partner
- Could salary sacrifice help you keep your tax bills down?
1) Make the most of your ISA allowance
This tax year you can invest up to £20,000 into a cash, stocks and shares, or innovative finance ISA, or a combination of these, and you won’t have to pay income tax on any returns you make.
You also won’t be charged any capital gains tax (CGT) on any gains you make when you sell an investment wrapped in an ISA. Learn more about CGT in our article What is Capital Gains Tax and how do I pay it?
Your ISA allowance is a ‘use it or lose it’ allowance, so if you don’t use it by April 5, it will be gone for good. You’ll get a new £20,000 ISA allowance at the start of the 2023/24 tax year on April 6.
If you’ve decided you want to put money into a stocks and shares ISA before the end of the tax year, don’t worry if you need more time to decide where to invest your money, as most stocks and shares ISAs allow you to put your allowance into cash and then move it into investments later.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
2) Top up your pension
You can pay up to £40,000 each tax year into your pension and your contributions will benefit from valuable tax relief.
So if you’re a basic rate taxpayer and wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax.
If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically and then will have to claim the remaining 20% through your tax return or by calling HMRC. The same goes if you’re an additional rate taxpayer, only you can claim an additional 25% on top of the usual 20%, giving you total pension tax relief of 45% (or in other words, you can effectively pay £100 into your pension for only £55). Find out more about claiming higher rate tax relief in our guide How do I reclaim higher rate pension tax relief?
It’s worth remembering that pension tax rates and benefits can change and are dependent on your personal circumstances so there are no guarantees that current rules will continue to apply in future. If you’re not sure about investing or how pensions work, it can be a good idea to seek professional independent financial advice.
You can find a local financial advisor on VouchedFor* or Unbiased.co.uk*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
3) Can you use carry forward?
You may be able to pay more than your £40,000 annual allowance into your pension under ‘carry forward’ rules, if you haven’t made full use of this allowance in the previous three tax years. This can be a useful way of boosting your retirement savings and benefiting from tax relief, particularly as you approach retirement. Learn more about how carry forward rules work in our article Pension carry forward explained.
4) Don’t leave your last drawdown payment too late
If you’re already taking an income from your pension using flexible drawdown, make sure your last payment this tax year arrives in your account before April 5, or you could potentially end up with a higher tax bill next tax year.
For example,if you receive £1,000 a month in income via flexible drawdown, with your final payment landing before April 5, which means the total £12,000 you’ve received over the year falls within your personal income tax allowance of £12,570. However, if you receive your last £1,000 payment from April 6 onwards, this means you could end up losing some of your tax-free allowance this tax year, so you end up paying more tax in 2023/24.
5) Pay into a pension for a partner or child
Anyone can set up a personal defined contribution pension, such as a stakeholder or self-invested personal pension (SIPP), and pay into it for someone else. You can learn more about how SIPPs work in our article Everything you need to know about SIPPs. That means that if, for example, your spouse or civil partner isn’t working at the moment, you can pay into a pension on their behalf. Up to £2,880 a year can go into their pension and they’ll still get tax relief at the basic rate. Find out more in our guides Can my husband or wife pay into my pension? and Should I start a pension for my child or grandchild?
6) Make sure your child’s savings are tax efficient
You can save or invest up to £9,000 into a Junior ISA in the current tax year, and this is on top of your own £20,000 allowance. Unlike adult ISAs, money is locked away until your child is 18 and they don’t take out a new ISA every year. You can put money into a cash or stocks and shares Junior ISA, or your child can have one of each.
Your child won’t necessarily pay tax on the interest they receive anyway (not until they start earning) as children – like adults – get a personal tax allowance. However, a Junior ISA can be useful for money that parents want their children to have later on, perhaps to cover university costs, help them buy a car, or to put towards a property deposit. Find out more in our guide Financial gifts for young children: what are the options?
7) Could you ‘Bed and ISA’ other investments?
If you don’t have cash available to use this year’s ISA allowance, but you have other investments, you might want to consider re-buying them within an ISA to protect them from tax changes.
Many tax allowances will be frozen or are due to reduce in the next tax year, including the annual Capital Gains Tax (CGT) exemption, which will halve from £12,300 to £6,000 at the start of the 2023/ 24 tax year. This means that if you have investments held outside of an ISA, you might want to think about selling them and re-buying them within an ISA so that any returns will be tax-free. This process is known as ‘Bed and ISA’. You can find out more about how it works in our guide What is a Bed and ISA?
8) Look at ways to reduce any potential Inheritance Tax liability
Many people resent the idea of paying inheritance tax but there are ways you can reduce your potential IHT bill – and that’s by using your allowances. These include:
- A £3,000 gift allowance. You can give up to £3,000 away every tax year, either to one person or split between several people.
- Smaller gifts £250 allowance. You can give up to £250 to whoever you want (but you can’t give more than one gift of £250 to the same person in the same tax year).
- The ability to give away money or assets to your husband, wife or civil partner. Spouses and civil partners can give assets to each other – such as money, property and savings – without incurring an IHT liability.
Various other allowances and exemptions apply, so it’s well worth taking advantage of them. Find out more in our guide Which gifts are exempt from Inheritance Tax? You can learn more about Inheritance Tax in our article Understanding Inheritance Tax.
9) Consider transferring assets to your spouse or civil partner
If you’re paying a higher rate of income tax than your spouse or civil partner, you might want to consider maximising your tax allowances by transferring assets such as savings or investments into their name. This means you’ll be able to make full use of both your personal savings allowances, dividend allowances and capital gains tax (CGT) allowance to help keep potential tax bills down. Remember, however, that if you are thinking about moving assets over to them, they will become the legal owner, so you must be certain that you trust each other completely before taking this step.
10) Could salary sacrifice help you keep your tax bills down?
If you’re expecting a bonus or pay rise to push you into a higher tax band, you might want to ask your employer if they can reduce your pay in exchange for a particular benefit, for example, pension contributions or a company car. This is known as ‘salary sacrifice’ and it often appeals as it means you will not be charged tax or National Insurance contributions on the amount deducted, only on the actual pay you receive. As employers make National Insurance payments for all of their employees, both you and your employer can end up saving this way. Learn more about salary sacrifice and whether it could benefit you in our guide What is salary sacrifice?
Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.