Annual allowances – use them or lose them

Annual allowances - use them or lose them

Steven Pinhey, technical officer at the Association of Taxation Technicians (ATT) considers four allowances to use before it’s too late

Annual allowances – use them or lose them

With the end of the tax year (April 5, 2023) fast approaching, it’s worth thinking about how you can maximise some of the many available annual tax allowances. Where these can’t be rolled forwards, if you don’t use them during the tax year, then they will be wasted.

Here are four allowances to consider before it’s too late.

Personal savings allowance

Depending on your income, it may be possible to receive interest on bank, building society and other accounts and pay no tax on it thanks to the savings allowance. If you are a basic rate taxpayer then the allowance is £1,000, whereas if you are a higher rate taxpayer then it’s halved to £500. Additional rate taxpayers don’t get any allowance.

With savings rates increasing, if you are likely to go over these limits, then it’s worth looking at whether an ISA (see below), even with a lower interest rate, would be a more tax efficient investment. A further planning point – which will require some number crunching – if you think your income will just tip into the higher or additional rate bands in coming years, is to consider taking steps to reduce your income by making additional pensions contributions or gift aid payments to bring it back into the lower band.

More information on the Personal Savings Allowance can be found here.

Dividend allowance

If you are receiving dividends, then unless they fall within your Personal Allowance or are wrapped in a Stocks & Shares ISA (more on these below), they will be taxable to the extent they are above the dividend allowance.

For the current tax year (2022/23), the dividend allowance is £2,000, which means that you can earn up to £2,000 of dividends without paying tax. Those who can influence the amount of dividends they receive, possibly because they have their own company, should bear in mind that the dividend allowance is set to reduce to £1,000 from 6 April 2023 and then further to £500 from the 6 April 2024. Therefore, dividends will become more expensive after 5 April 2023, so use your 2022/23 allowance if you can. If you can’t influence dividends, then an ISA may be another option.

More information on dividends can be found here.

ISA allowances

Individual savings accounts (ISAs) are a great vehicle to save and invest for the future in a tax efficient manner. Any returns or income made within an ISA are both Income Tax and Capital Gains Tax free, so investments in an ISA will not be affected by the reducing Capital Gains Tax allowance (see below).

There are essentially four types of ISA for to choose from:

  1. Cash
  2. Stocks & Shares
  3. Innovative Finance – for those who want to use get involved in peer-to-peer lending.
  4. Lifetime – to be used for first property purchases or retirement

The maximum investment in Cash, Stocks & Shares and Innovative Finance ISAs for the current tax year (2022/23) is £20,000, and the Lifetime ISA allowance is £4,000. You can choose to invest the maximum in one type of ISA or you can decide to spread the allowance across the different types.

As well as these ISAs aimed at adults, there are also junior ISAs for children under 18 with a savings limit of £9,000 per annum. They are a great vehicle for parents or grandparents wanting to help children/grandchildren save for future events such as college or university fees, property deposits or becoming more financially independent.

More information on ISAs can be found here.

Capital gains tax allowance

The Capital Gains Tax (CGT) allowance for the current tax year (2022/23) is £12,300, which means that when you sell assets such as property or shares you will not have to pay any tax on your first £12,300 of gains. However, from 6 April 2023, the CGT allowance will be cut to £6,000, before it halves again in 2024/25 to just £3,000 a year.

If you have investments such as shares which have increased in value since their purchase, one option is to ‘bank’ the gains by selling the assets whilst they are still covered by the higher CGT allowance and then buying them back later. You would need to wait 30 days from the sale for the rebasing described above to work, during which time there is the risk that the price might move.

There are many other annual tax allowances which are familiar to us. Where these can’t be rolled forwards, make sure that you have considered them during the tax year to ensure that they won’t be wasted.

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