April: a month to reset

The month of April brings longer, brighter, hotter days, and the excitement of summer just around the corner. It is also the perfect time to have a quick think about your financial future.

Your annual allowances have reset at the onset of the new tax year, which kicked off on 6 April. Some allowances have remained untouched, but others have changed following the most recent Spring Budget in March.

While these allowances apply to all individuals in the UK, there is no one-size-fits-all approach for those looking to make the most of them. This depends entirely on individual circumstances.

In this article we’ll outline some of the tax allowances available for the tax year 2024/25, as well as some of the changes to your allowances compared with the previous tax year.

Happy birthday, ISA

Arguably one of the most important tax allowances to make use of is the Individual Savings Account (ISA) which allows you to save up to £20,000 every year, free of tax. This means that, every year, the interest paid on this account is tax-free, including the compound interest made through previous years’ contributions.

Over the long term, this compounding effect should make a significant difference in your tax-free savings, so it’s important to contribute as much as you can to your ISA every year.

And one of the reasons we’re strong advocates of planning your financial future early in the tax year is exactly because of this. For instruments like an ISA, the sooner you start investing, the sooner your money will be working for you.

The ISA was first introduced in April 1999 by the UK government, so it is celebrating its 25^th birthday this year.

Although the tax-free allowance for this year hasn’t changed, the government has applied some changes to the ISA structure. While previously savers could only pay into one cash ISA, one stocks and shares ISA or one innovative ISA, from 6 April 2024 there are no restrictions on the type of ISA or number of providers.

While it might sound unappealing to create various ISA accounts for the same tax year on account of the administrative burden involved, this should be seen as a welcome change from the government. The different types of ISA accounts can be used for different purposes, and should be chosen based on specific circumstances.

For instance, a choice of ISA could be solely based on an individual’s risk appetite, with a more conservative approach in favour of a cash ISA, whereas for a riskier profile a stocks and shares ISA could provide (but not necessarily guarantee) further growth by comparison. The possibility of blending these two types of ISAs could add more granularity to the saver’s risk profile.

As part of the new measures the UK government announced as part of the Spring Budget in March, a ‘UK ISA’ – which is at consultation phase until June – could be introduced to encourage investment into British companies. The implementation of the UK ISA would result in an extra £5,000 of tax-free savings, on top of the existing £20,000 ISA allowance.

The (increased) value of a pension

After announcing some changes to pensions in 2023, the UK government has abolished the lifetime allowance starting from the 2024/25 tax year.

Under the previous rules, an individual could save up to a maximum of £1,073,100 into their private pensions free of tax. From this tax year there is no maximum limit.

But there is still a maximum that can be allocated into a pension tax-free every year, and that amount remains at £60,000 per tax year, or 100% of the individual’s annual earnings.

It’s worth noting that individuals are entitled to carry over their unused annual allowance in the previous three tax years. If you have any questions about how to structure your payments into your pension, get in touch with your financial planner.

Individuals under certain circumstances could be subject to different rules. For instance, if your threshold income is over £200,000 and your adjusted income is over £260,000, you are entitled to a tapered annual allowance, which reduces the annual allowance by £1 for every £2 over £260,000.

If you’d like to increase your contributions into your pension pot, the abolition of the lifetime allowance could make a significant difference to how you contribute. Speaking to a financial planner who could run a professional cashflow model should provide the insights – and therefore the reassurance – into the best course of action for your specific circumstances.

Don’t take allowance cuts personally

For the tax year 2024/25, the personal savings allowances remain unchanged from the previous year.

Basic rate taxpayers have a tax-free limit of £1,000 on their dividend and savings income. Higher rate taxpayers – individuals earning between £50,271 and £125,140 – have a tax-free allowance of £500. For additional rate taxpayers – those with a taxable income of over £125,140 – all gains on personal savings are subject to tax.

But for dividend income – meaning all the income originating from owning shares in companies – that’s a different story. The UK government has halved the dividend allowance to £500 in year 2024/25.

For those whose financial planning circumstances include a portfolio with exposures to instruments providing dividends, it is worth talking to a financial planner to find out how this change could affect you.

In light of these changes, it could be worth checking whether your portfolio would benefit from other changes to facilitate further tax relief. For instance, Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs) are two ways of investing in companies while benefitting from generous tax reliefs.

As with any investments, your capital is at risk and that these options might not be suitable for investors with more conservative risk profiles as they do carry a higher degree of risk. Again, we recommend you speak to your financial planner to discuss whether this is an option worth pursuing, based on your circumstances.

Go with the (cash) flow

There is plenty to think about in the beginning of the new tax year, and it certainly pays off to assess your finances early if you can so to start leveraging the compounding effect of growth. In the longer term, this compounding effect could make a significant difference in your portfolio.

But navigating changes, and making the right choices – especially in light of all recent changes that UK government made to tax allowances – could be challenging.

That’s where a Chartered Financial Planner can offer the highest value. At 7IM, for instance, we use our proprietary Lifetime Wealth Model, a cashflow model that assesses an individual’s ability to reach financial freedom in their own terms, taking into account their financial circumstances.

With the Lifetime Wealth Model, you tell us what financial happiness looks like to you, and we’ll tell you the ways to achieve it.

Regardless of where you are in your journey towards financial freedom, April is a good month to think about your financial dreams, and to check whether you’re on course to achieve them. Reach out to 7IM, and our Chartered Financial Planners will listen to your ambitions and discuss with you the best way to get there.