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Use it or lose it: 2 important facts to learn about your tax year allowances

The new tax year is upon us – and with it comes the opportunity for a fresh start for your finances.

However, the cost of living crisis could still be on your mind, with inflation reaching 10.4% in the year to February 2023, the Office for National Statistics (ONS) reports.

Inflation dampens the public’s spending power and could cause you some worry if you are approaching retirement, hoping to help the next generation financially, or have other financial dependents.

Whatever your situation, it’s likely you are searching for ways to get more from your assets in the coming year.

One all-important aspect of your finances that can help grow your wealth is your tax year allowances. Every April, your tax-efficient allowances reset, giving you the chance to invest, save, and earn without increasing your tax bill. These include:

  • Your Income Tax Personal Allowance

  • Your ISA subscription limits

  • Key pension allowances, such as the Annual Allowance and Money Purchase Annual Allowance (MPAA)

  • The Dividend Allowance

  • The Capital Gains Tax (CGT) annual exempt amount.

Making the most of your tax allowances could be even more crucial this year as you seek ways to minimise the impact of the high cost of living.

So, here are three important facts to learn about your 2023/24 tax year allowances, and how we can help you make the most of them here at Atherton York.

1. Maximising your Stocks and Shares ISA allowances at the start of the tax year can greatly benefit your wealth

The beauty of tax year allowances is that you have a full 12 months to make the most of them.

For example, you have all year to contribute up to £20,000 across all the ISAs you hold, spread however you like within their individual contribution limits.

Yet one thing you may not already realise is that paying into your Stocks and Shares ISA (or other investment accounts) at the start of the tax year can help grow your wealth more quickly than if you paid your contribution at the end of the year.

Indeed, the below graph shows that if you paid £5,000 a year into a Stocks and Shares ISA between 1999 and 2021, those who invested at the start of each year would be £7,795 better off overall.

Source: HL. Includes 2020/21 subscriptions for both.

So, as the new tax year lands, it could be wise to review your savings and prioritise making Stocks and Shares ISA contributions as early as you can. Working with your financial planner could help in this instance, so get in touch if you need ISA guidance.

In addition, although this research specifically relates to ISAs, any investment accounts you hold (including your pension) follows the same theory. While past performance is not a reliable indicator of future performance, and returns are never guaranteed, routinely investing at the start of the tax year could boost returns in the long term.

2. Several tax allowances are set to change or freeze in 2023/24

In his spring Budget, Jeremy Hunt focused on increasing – or abolishing – three key pension allowances. You can read our insights into the Budget, and a deep-dive into how these might benefit you, on our news page.

On a slightly less positive note, a number of tax allowances are decreasing or freezing this year, all of which could increase your tax burden. Here are three tax allowances that won’t be rising in line with inflation for the coming few years.

  • The Capital Gains Tax annual exempt amount

When you sell assets, including non-ISA shares, properties that aren’t your main home, and business assets, you may pay CGT on the profits you earn.

In the 2022/23 tax year, the CGT annual exempt amount – the profits you can make without paying CGT – stood at £12,300.

But in April 2023, the CGT annual exempt amount is reducing to £6,000. What’s more, the allowance will reduce again to £3,000 in April 2024.

So, making the most of the allowance you do have, and working with a professional to maximise these opportunities, may be all the more pertinent in the years to come.

  • The Inheritance Tax nil-rate bands

You may be aware that when an individual dies, their estate may be subject to a 40% Inheritance Tax (IHT) bill.

Fortunately, there are “nil-rate bands” under which the beneficiary will not pay IHT. The nil-rate band, applying to cash, investments, and any other non-property assets, stands at £325,000. In addition, the residence nil-rate band, applying to family property, is £175,000.

Importantly, these allowances have been frozen until 2026 by former chancellor Rishi Sunak – unlike some other allowances, they won’t rise in line with inflation.

This means that if you are set to inherit an estate that is appreciating in value each year, you may pay an increased IHT bill as a result.

  • The Dividend Allowance

Finally, if you take dividends as part of your salary, or you own dividend-paying shares, it is important to be aware that the Dividend Allowance is reducing in 2023/24.

Originally standing at £2,000 in 2022/23, the Dividend Allowance is now decreasing to £1,000 in the 2023/24 tax year, and to £500 in 2024/25.

Once again, this means your Dividend Tax bill is likely to increase over the coming years – even if the dividends you take do not increase in value.

In the case of all the upcoming allowance freezes and reductions, it could be constructive to get in touch with your financial planner and prepare your wealth for their effects.

If multiple areas of taxation increase all at once, as they may do for many individuals, the guidance of a professional could help you take practical action and provide peace of mind too.

Get in touch

To make the most of your finances as the new tax year begins, get in touch with us today. Email or call us on 0208 882 2979 for more information.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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