Mastering your tax allowances for more money in your pocket

Once again, in 2024/2025, the amount of money that can be claimed on tax relief is dropping. Before the end of the tax year, have a conversation with your financial adviser to ensure that you’re making the most of your allowances.

Overview:

Big changes are coming to tax allowances that will affect both Capital Gains Tax and Dividend Tax.
Ahead of the tax year-end, it’s therefore important to make the most of your pensions and ISAs, and even your gifting allowances!
Get in contact with us today and we can assist you in making your money work as tax-efficiently as possible – ensuring you pay the least amount of tax.

In February or March, you’re probably looking out for a reminder from your financial adviser or accountant prompting you to take advantage of your annual tax reliefs and allowances. However, many families are still needing to be cautious with their budgets – most of the time there’s very little, if any, remaining to put into savings or investments.

So the last thing you want to do is pay out more money on tax than you need to on anything that you save or earn.

Despite this, the upcoming changes to Capital Gains Tax and Dividend Tax allowances are ones that you need to be made aware of. Additionally, if you’re entitled to any other tax allowances, you’ll need to be updated on those changes. Using every allowance can make a huge difference.

Here’s what you need to know about before the end of this tax year on 5th April and how we can best help you in these matters.

What is happening to the Capital Gains Tax Allowance?

The Capital Gains Tax (CGT) allowance for the current tax year (2023/24) stands at £6,000 – half of what it was a year ago.

What does this mean for you? If it’s part of your plans to sell investments or property, other than your main residence, you are allowed to keep £6,000 of the profit, or ‘gain’, before paying any CGT.

It’s important to note that the CGT allowance will halve again in the 2024/25 tax to £3,000. It would be advisable to sell an asset before the tax year comes to an end if this is suitable and possible for you.

For CGT, the current rate is 10% for basic-rate taxpayers, 20% for higher or additional rates and 18% and 28% respectively if you sell property that isn’t your main residence.

What are the ways around paying less CGT?

You can mitigate a CGT bill in a number of ways, including selling off assets over a number of tax years or utilising a spouse or civil partner’s allowance in addition to your own.

If spreading the sale of your assets to bring your CGT bill down is part of your plans, it’s sensible to discuss this with your financial adviser, as they will be able to explain how exactly this will affect your plans in the long run.

How has the Dividend Tax allowance changed?

If you receive income from dividends, you may be disheartened to find out that the government is also altering the rules on Dividend Tax in the 2024/25 tax year. Anything that you earn from company shares – including money held in collective investments, which can include funds and investment trusts – is subject to Dividend Tax charges.

The current Dividend Tax allowance is £1,000, so some of the money earned from dividends is tax-free. But in a similar pattern to CGT, this allowance will also halve in 2024/25, this time to £500.

As a basic-rate taxpayer, you’ll be paying 8.75% Dividend Tax
As a higher-rate taxpayer, you’ll be paying 33.75% Dividend Tax
As an additional-rate taxpayer, you’ll be paying 39.35% Dividend Tax

Ways to shelter your money from CGT or Dividend Tax

By moving your investments into more tax-efficient wrappers like a pension or a Stocks & Shares ISA, you can shelter your investments from Dividend Tax and CGT.

You can pay up to £20,000 into an ISA each year. Alternatively, you can save into a pension and, subject to certain limits, you can claim tax relief – although this is also subject to certain limits.

As it stands, you’re able to put £60,000 into your pension per year, or 100% of your income if it is less than £60,000.

It’s worth having a discussion with your adviser for more ideas if you have already maxed out your ISA. Passing on your wealth to future generations is another way to reduce your tax bill.

You could consider opening a pension for another family member, partner or new child or grandchild.
You can open a Junior ISA or JISA – Junior ISAs presently have a lower tax allowance (£9,000 a year 2023/24). Only a parent or legal guardian can open a JISA or a junior pension, but once it’s opened, anybody can pay money into it.

JISAs are often passed over, but they’re a very tax-effective way of saving a lump sum for younger family members. This serves as an advantage to everyone – your family won’t have to wait for an inheritance lump sum, and you’ll reap the tax benefit.

Are you paying too much tax on your cash savings?

Considering where you want to hold your cash savings is well worth the thought, but it varies as to the type of taxpayer that you are.

Basic-rate taxpayer: You will be able to earn £1,000 of interest on your savings that is tax-free.
Higher-rate taxpayer: You will be able to earn up to £500 in interest before tax comes into the picture. This is called your Personal Savings Allowance, but it’s dependent on your circumstances – you might benefit from using your £20,000 annual ISA allowance for Stocks & Shares, Cash ISA or Cash.

How much money can I give to a family member?

It’s probable that your estate will be liable for Inheritance Tax (IHT) when you pass away. It’s advisable to think about ways in which you can reduce the size of your estate and consequently your IHT bill. This can be done through the use of your gift allowances.

You can give away up to £3,000 (£6,000 between couples) per year.

Wedding bells ringing? If you have an upcoming marriage or civil partnership within your family, you have the option to gift up to £5,000. It’s also acceptable to make many smaller gifts up to £250 in value.

Keep a note of dates and the amounts of gifts sent out, and also who received them. This will make winding up an estate easier for your family as they will have access to dates and details and are likely to remember the gifts. Your Wellesley financial adviser should also have a record of any gifts that you give.

Keeping aware of tax changes throughout the year

It’s sensible to contact your financial adviser throughout the year, not just at the end of the tax year. Keep your reviews regular to alert you to take full advantage of reliefs and allowances, especially if there has been a change in family circumstances – a birth, a wedding, a change of job or a salary increase. Your adviser can reassure you that you are not paying too much or too little tax or breaking any rules that you weren’t aware had changed.

Planning for the end of the tax year doesn’t need to be rushed, but as key allowances are being reduced, it’s recommended that you get in contact with us to assess any impacts ahead of time.

The value of an investment with Wellesley will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that Cash ISAs are not available through Wellesley.