The end of the tax year in the UK is nearly here, which means it’s time to start thinking about tax planning for the year ahead. By taking advantage of the tax allowances available to you, you can reduce your tax bill and maximise your savings.
In the ultimate tax planning checklist: how to make the most of your UK tax allowances, we’ll explore some of the key tax allowances and offer tips on how to make the most of them.
Pension Annual Allowance
The pension annual allowance is the amount you can contribute to your pension each year without incurring tax. If you have the means to do so, it’s worth considering making the most of this allowance before the end of the tax year.
By contributing to your pension, you can reduce your taxable income and benefit from tax relief on your contributions. This allowance includes tax relief. This means that for every £100 you contribute, the government will add £25 (assuming you pay basic rate tax) to your pension. If you’re a higher or additional rate tax payer you can claim further relief through a self -assessment tax return.
However, be aware that if your income is over £240,000, your annual allowance may be reduced. This is known as the tapered annual allowance, and it reduces your annual allowance by £1 for every £2 of income over the threshold. This can make it more difficult to maximise your pension contributions if you are a high earner. This makes pensions an attractive investment for those looking to save for retirement.
An ISA (Individual Savings Account) is a tax-efficient way to save or invest your money. The current annual allowance for ISAs is £20,000, and you can split this allowance between cash, stocks and shares, and innovative finance ISAs as you see fit.
Any returns on your investment are tax-free, which makes ISAs an attractive option for those looking to save for the short or long term. If you haven’t used your ISA allowance for the year, now is a great time to do so.
The dividend allowance is the amount of dividends you can receive tax-free each tax year. Currently set at £2,000, it allows investors to earn a certain amount of income from their holdings without having to pay any tax. However, from the tax year 2023/24, this allowance will be reduced to £1,000.
If you have investments that generate high dividends, you may want to consider selling some before the end of the tax year to take advantage of the higher allowance. This means that any dividends received above this allowance will be subject to income tax at your usual tax rate.
Capital Gains Tax Allowance
The current capital gains tax allowance is £12,300, which means you can make a profit of up to this amount on the sale of an asset without incurring any capital gains tax. However, from the tax year 2023/24, this allowance will be reduced to £6,000.
If you’re planning to sell an asset that will generate a capital gain, you may want to consider doing so before the end of the tax year to take advantage of the higher allowance. This means that any gains made above this allowance will be subject to capital gains tax at your usual tax rate.
Gift Aid is a tax relief scheme that allows UK charities to claim back the basic rate of tax on donations made by UK taxpayers. If you are a higher or additional rate taxpayer, you can also claim back some of the tax you have paid on your donation.
If you’re planning to make charitable donations, you may want to consider doing so before the end of the tax year to benefit from the tax relief available. This means that if you donate £100 to charity, the charity can claim back an additional £25 from the government. If you are a higher or additional rate taxpayer, you can also claim back some of the tax you have paid on your donation. This makes charitable donations a tax-efficient way to give to good causes.
Annual Exemption Allowance and Small Gift Allowance
The annual exemption allowance allows you to give away up to £3,000 each tax year without incurring any inheritance tax. In addition, there is a small gift allowance of £250, which allows you to give away up to £250 to as many people as you like each tax year without incurring any inheritance tax. If you haven’t used these allowances for the year, now is a great time to do so.
State Pension Top Up Deadline
The state pension top up deadline has been extended to July 2023. This allows people to top up their state pension by paying in additional voluntary contributions. The amount you can top up by depends on your age and how much additional state pension you want to receive. If you’re planning to top up your state pension by paying in additional voluntary contributions, you may want to consider doing so before the deadline to maximise your state pension benefits.
By taking advantage of the tax allowances available to you before the end of the tax year, you can significantly reduce your tax bill and maximise your savings. Whether it’s contributing to your pension, investing in an ISA, or making charitable donations, there are plenty of ways to make the most of these allowances.
With the tax year end just around the corner, now is the time to review your finances and ensure you’re making the most of the opportunities available to you. By doing so, you can set yourself up for a more financially secure future.