Six tips to make the most of your tax allowances

When you’re investing for the future, you want to make sure you’re doing so as tax efficiently as possible. It can be hard to know which tax benefits you’re entitled to or how certain rules work, especially when the clock is ticking ahead of the tax year end. Here’s a helpful guide to get you started.  

Here are six ways you can make the most of your tax allowances: by using your ISA allowances, reviewing your pension contributions, using your dividend and capital gains tax allowances, considering charitable donations, or gifts to loved ones.  

1. Make use of your ISA allowances

ISAs are a great way to shelter savings and investments from income tax, dividend tax, and capital gains tax. Your ISA allowance for the current tax year is £20,000. Any interest or returns you make are tax-free, but contributions above the annual allowance may be liable for tax.  

There are several types of ISAs available to adults living in the UK, including: 

• Cash ISAs, where interest earned on your savings is tax-free. Some providers offer higher interest rates if you lock your money in for a set period.  
• Stocks and shares ISAs, which are a tax-efficient way to invest. You pay no tax on returns. Over the longer-term, stocks and shares ISAs offer the potential for higher returns than cash ISAs. But remember that, as with all investing, there is a risk that the value of your investments could fall. 
• Lifetime ISAs, which those aged 18 to 39 can open to help buy their first home or prepare for retirement. If you’re eligible for a LISA, you can benefit from a 25% government bonus on your contributions. You can invest up to £4,000 each year and get a maximum bonus of £1,000 over that period.  

Think you’re going to max out your ISA allowances, and don’t want to pay tax on any additional contributions? You have several options. Depending on what’s right for your circumstances, you could consider topping up your pension, opening a junior ISA for your child if you’re a parent or guardian, or overpaying your mortgage.  

We understand that tax can be a tricky topic. If you’d rather speak to a member of our expert team about which products might be right for you, or how certain benefits work, you can book a free call today.  

2. Review your pension contributions

When you put money into your pension, the government gives you tax relief. This means they add the money you would have paid in income tax to any contributions you make, up to the value of your total annual earnings or the annual allowance, whichever is lower. So, if you want to make a £10,000 contribution to your pension, you pay in £8,000 and the government will add £2,000. If you pay a higher rate of income tax, you may be able to claim back even more from the government by filling in an annual tax return form.  

In the 2022/23 tax year, the most you can pay into your personal pension is £40,000. In the 2023/24 tax year, the annual allowance for pensions will rise to £60,000. You may be able to carry forward your unused annual pension allowance for up to three years. If your ‘adjusted’ income is over £240,000, you will have a reduced annual pension allowance. 

Paying more into your pension can be a good option if you’re a higher earner, because you start to lose your tax-free personal allowance when you earn more than £100,000. If you increase your pension contributions, you may be able to get it back, as your income on your tax return is adjusted to take pension contributions into account. The same calculation applies to the loss of child benefit. 

3. Use your dividend allowance

In the 2022/23 tax year, the dividend allowance means you can take £2,000 of dividend income without paying any tax. This can be helpful if you’re a shareholder or a director of a company, or an investor who earns dividends outside a stocks and shares ISA.  

It’s important to note that the dividend tax allowance is being cut. In the 2023/24 tax year, it will fall to £1,000, and in the 2024/25 tax year it will fall again to £500. How much tax you pay on dividend income above the annual allowance depends on how much income tax you pay. If you think you might be impacted by the changes, our team can help.  

4. Be smart with your capital gains tax allowance

If you sell or gift items or investments worth more than £6,000 outside of an ISA or a pension, you don’t have to pay tax on the first £12,300 of any profits you make. This is your capital gains tax (CGT) allowance. It resets each tax year, and you can’t carry any allowance over into the following year.  

If you’re thinking of selling individual shares or a portfolio that has done well and has gains that exceed the capital gains tax allowance, it may make sense to time the disposal of your assets – for instance, you may want to split the sale over more than one tax year. Our CGT calculator can help you estimate what you owe. 

It’s worth bearing in mind that the CGT allowance is also changing in the coming tax years. Your allowance will fall to £6,000 in the 2023/24 tax year, and £3,000 in 2024/25.  

5. Donate and save

By making charitable donations, you can help good causes while reducing the amount of tax you pay. You can get full tax relief on contributions you make to registered charities. 

To make the most of this tax relief, take some time before the end of the tax year to check what donations you’ve made and consider making more. 

Gift-aided donations operate in a similar way to pension contributions in that they can effectively reduce your income for tax purposes and adjust tax thresholds — and can therefore be particularly helpful for higher income earners. 

Not sure how to check how much you’ve given this year? If you’ve donated via ‘Just Giving’ or a similar website, your account should reveal your donations. The website will probably have claimed the basic rate tax relief on the charity’s behalf, but if you’re a higher rate taxpayer you’ll need to reclaim the higher rate through your tax return. 

6. Give to your loved ones

Did you know that inheritance tax rules allow you to give away up to £3,000 a year without incurring any death duties? You can give more than that, but larger amounts are only tax-free if you, as the giver, live for seven or more years beyond giving the gift.  

You can also carry forward one unused year of gifts, so you could use this tax break to donate a total of £6,000 in any one tax year. This might be beneficial if you want to help towards those ever-increasing expenses faced by your children or grandchildren. 

There is also a small gift exemption of £250 available. This allows you to give gifts to as many people as you want, provided they haven’t also received part of your main £3,000 allowance. 

If you are thinking of giving a gift, make sure you can absolutely afford to do so, and that it’s in accordance with any other inheritance or estate planning you have in place. 

The 2023/24 tax year is about to begin 

The 2022/23 tax year ends on 5th April. While some of this year’s tax allowances can be carried forward to future years, some can’t, like your ISA allowance, dividend allowance, and capital gains tax allowance. Now may be a good time to check your contributions and allowances and make sure that you’re maximising all opportunities to reach your goals and getting your money to work for you. 

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. If you need help with financial planning, please seek financial advice.