Preparing for Financial Success in 2023/24

As the clocks strike midnight on 6 April, a new tax year is upon us. With this, comes the resetting of all tax allowances, reliefs and exemptions.

Whether you are establishing a financial plan for the first time or continuing to enhance your existing one, making use of the allowances, reliefs, and exemptions as they become available can pay dividends – no pun intended, I promise.

The new 2023/24 tax year brings significant changes compared with the previous year, which makes it even more important you take action to ensure the tax efficiency of your plan.

The following are some of the changes to consider:

No changes to ISAs – use your £20k allowance

Despite the rumours circulating prior to the Spring Budget in March, the annual ISA subscription has remained at £20,000. An ISA allows you to hold cash or investments in a tax-efficient way, with all capital growth and income free of tax. In addition, any withdrawals are tax-free.

An ISA is a great savings vehicle to build wealth for the future, and using this allowance early in the tax year will allow for your funds to grow and compound for longer, resulting in a potentially larger tax-free sum in the future.

The same applies to a Junior ISA (JISA), which is a great way to help children (or grandchildren) build wealth for the future. The annual JISA subscription remains at £9,000.

Plenty of pension changes bring plenty of opportunities

The most recent Spring Budget has brought forward several changes to pension contributions from 6 April. The Annual Allowance will increase from £40,000 to £60,000, with the tapered Annual Allowance increasing from £4,000 to £10,000. Once combined with the reduction to the additional rate tax threshold (£150,000 down to £125,000) and the loss of personal allowance (between £100,000 and £125,140), utilising your available Annual Allowance could be extremely advantageous.

Saving into a pension is a very tax-efficient means to save for the future. Tax relief between 20% and 45% is applied, depending on your level of income tax. This could mean that, for every £1 invested in your pension, the actual cost to you could be as little as 55p. In addition, there could be national insurance savings too.

If you have not been able to make full use of your contribution allowances over the previous three tax years, you might be able to benefit from making a larger contribution in the current tax year. This is known as ‘carry forward’.

Pension planning can be very complicated, so we strongly advise you speak to a professional before making any contributions or changing any of your existing plans.

Married? A potential £252 saving

If you are married, or in a civil partnership, your spouse earns less than £12,570 and you are not currently benefitting from the Married Couples Allowance, it is possible to transfer up to £1,260 (circa 10%) of their personal income tax allowance to you – providing you earn between £12,571 and £50,270, or between £12,571 and £43,662 if you’re in Scotland. This could reduce your tax bill by up to £252 in the 2023/24 tax year and you could even backdate any claim for up to four tax years.

Venture Capital Trusts (VCTs) remain and can bring 30% tax relief

A VCT investment can benefit from 30% tax relief – therefore, a £50,000 investment would result in a £15,000 tax credit to set against your overall tax liability. This is particularly advantageous if you are a higher or additional rate taxpayer. Any gains made on an initial investment, irrespective of when the investment is sold after the five-year holding period, are free of tax. A higher or additional rate taxpayer would therefore receive a 20% Capital Gains Tax (CGT) saving. Any dividends received are also tax-free, therefore saving 32.5% (as a higher rate taxpayer) or 38.1% (as an additional rate taxpayer) in tax.

As well as being a tax-efficient investment over the medium term, VCTs can complement school fee planning and retirement planning for high earners. But you should remember that these investments are a higher level of risk and so seeking advice as how they fit into your overall financial situation is important.

Capital Gains Tax (CGT) is halved

This tax year’s capital gains tax (CGT) allowance has been reduced by more than half, from £12,300 to just £6,000 per individual. If you have any unwrapped assets outside of, say, a pension or ISA, it may be beneficial to make use of your CGT exemption to avoid rolling up higher future tax liabilities. Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT exemption for the year. Furthermore, if the recipient pays tax at a rate lower than the individual making the transfer, any gains above the exemption could also incur less tax.

Having said all of this, it is very important to note that utilising your CGT exemption early in the tax year could put you at a disadvantage should you have other assets you need to sell later in the tax year. So, as with any changes you’re planning to make to your finances, it’s always sensible to look at your financial plan for the year and further ahead, to avoid any unwanted tax liabilities in the future.

If you want to start making the most of any of the allowances mentioned above, please do get in touch with us at 7IM, either through your Private Client or Financial Planning Director, or contact us on talktous@7im.co.uk.