Use up as much of your ISA allowance as possible
Individual savings accounts (ISAs) are one of the most tax-efficient ways to save and invest as there’s no income tax, personal tax on dividends or capital gains tax to pay on any investment growth or interest you earn. Plus, you don’t pay tax on money you take out of ISAs.
But with ISAs, it really is a case of use it or lose it as your ISA allowance refreshes every tax year, and you can’t roll over unused amounts.
Currently you can save or invest up to £20,000 into an ISA tax free in any tax year, with the most common types of ISAs being:
- Cash ISAs – good for building up an emergency pot of money or for shorter-term savings goals
- Stocks and shares ISAs – invest your money for longer-term goals, although remember that the value of investments can go down as well as up and you could get back less than you paid in
The £20,000 limit applies to the total amount saved across all ISAs in a tax year. And you can’t open two of the same type of ISA in the same year. So, for example, you couldn’t pay into two cash ISAs within the same tax year, but you could pay into both a cash ISA and a stocks and shares ISA.
If you want to save or invest for your children’s or grandchildren’s futures, they get their own Junior ISA allowance of £9,000.
Don’t forget about your pension allowances
Pensions are also a highly tax-efficient way to save for your future thanks to the tax relief you receive on any of the contributions you make to it – money given back to you by the government. If you’re a higher or additional rate taxpayer, you also benefit from 40% or 45% tax relief. (Income tax rates are slightly different in Scotland.)
Unless you’re a particularly high earner, you can normally contribute as much as you earn each year into your pension, up to the current annual allowance of £40,000, and benefit from tax relief on your contributions.
In the Spring Budget, Chancellor Jeremy Hunt announced that the main annual allowance will increase to £60,000. This increase will take effect from 6 April 2023.
Be savvy with bonuses
If you’re lucky enough to receive a bonus from your employer this year, its payment is likely to coincide with the end of the tax year.
The timing can sometimes be tricky when it comes to tax planning as the extra money may push you into a higher tax bracket. If you don’t need the money straightaway, you could consider redirecting bonus payments into your pension – whether that’s by setting up a private pension or asking your employer to direct it into your workplace pension. This could mean you save on the tax you’d pay if taking it as part of your income.
Use your CGT allowance while you still can
Don’t forget about your capital gains tax (CGT) allowance. CGT is paid on any gains you make when you sell an asset. For example, if you make a profit when you sell a second property or investments that aren’t within an ISA or pension.
However, you do have an annual CGT ‘exempt allowance’, within which no tax is due. Currently this is £12,300 but this will go down to £6,000 in the 2023/24 tax year, and then to £3,000 the following tax year.
So you could think about selling some assets to trigger capital gains this tax year and take advantage of the higher allowance that’s still available. You could then put that money into your pension to get the tax benefits from that. By doing that, you’ll also have moved money from inside your estate to outside your estate, which could have benefits for inheritance tax purposes.
For more about capital gains tax and the changes read our Guide to capital gains tax.
Be an early bird
Sometimes it’s unavoidable to finalise your tax planning just before the tax year end. But if it’s just a case of rushing to do this because you’ve put it off earlier in the tax year, consider how you and your finances might benefit from being an early bird next year. For example, you may have a better outcome by investing regularly into a stocks and shares ISA over the course of the year rather than in one lump sum just before the tax year end.
Get in touch if you need support
If you already have an abrdn financial planner and need advice on how to make the most of your tax allowances, get in touch with them – they’ll be happy to help. Or find out how we can help you with tax planning.
The information in this article should not be regarded as financial advice. Information is based on abrdn’s understanding in March 2023. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. The value of all investments can go down as well as up and you may get back less than you paid in.