5 Tax Hacks To Do Now
Here are 5 relatively straightforward ideas for reducing your taxes and increasing your after-tax investment returns. In all the examples, there is an element of 'use it or lose it'. In other words, you need to act before the end of the tax year (April 5th) in order to get all of the benefits mentioned.
Use the Capital Gains Allowance Before It Declines Substantially
In the current tax year, each individual can generate up to £12,300 of capital gains before any tax is due. However, this limit will decline to £6,000 in the 2023/24 tax year and to £3,000 from the 2024/25 tax year onwards. Therefore it probably makes sense for those with significant unrealised capital gains to realise those capital gains (i.e. sell the investments) in the current tax year, at least up to the £12,300 allowance.
Importantly, it is possible to transfer holdings to one's spouse without incurring a capital gains charge. So a married couple effectively has a £24,600 combined capital gains allowance in the current tax year.
Note that this idea may be relevant for anyone with longstanding vested equity from their employer or indeed anyone sitting on a readily realisable capital gain.
Open and Contribute to a Lifetime ISA (if under the age of 40/50)
HMRC will 'top up' any contribution to a Lifetime ISA by 25%. As the maximum contribution to a Lifetime ISA is £4,000, this means that there is up to £1,000 of free money available to you. The catch is that the funds cannot be withdrawn without penalty until you are 60 years old (or to help buy a first home worth up to £450,000).
A Lifetime ISA is often a no-brainer for those earning a high income especially as the amount that they can put into a pension may be reduced by a diminishing 'annual allowance' if they earn over a certain threshold.
Note that anyone under age 40 can open an Lifetime ISA but anyone age 50 can contribute to a Lifetime ISA. This means that anyone approaching their 40th birthday should open a Lifetime ISA if only to contribute a minimal amount so that they have the option of contributing throughout their 50s as well.
While we're on the topic of ISAs, we should make clear that everyone has a total ISA allowance of £20,000 each tax year. This is very much a 'use it or lose it' allowance so anyone, regardless of age, who can afford to stash money away into an ISA should probably do so prior to April 5th.
Use Pension Allowances Before Losing Them
We could write a whole article on things to do with pensions ahead of tax year-end but let's focus on two actions that must be completed by tax year-end.
1. 'Carry forward' if available. If you had a pension but did not contribute the maximum amount into it then you can 'carry forward' that allowance from up to three previous tax years. This can be a huge tax savings especially for some directors of limited companies and/or those in the 40/45% income tax bracket. On a related note, if you are not already a member of a pension scheme then consider joining one even if you make a minimal contribution as it will mean that this year's allowance is available in future tax years.
2. Contribute to your spouse's pension. This may be a particularly good idea if you are already maxing out your pension contribution. The amount you can put in and the tax savings will depend on the amount your spouse earns but the minimum tax rebate is 20% of the pension contribution. This idea can be really, really helpful if your spouse is in one of those hideous 'tax traps' that cause their effective income tax rate to be 60% or more (for example, if they earn between £100-125k per year).
Consider a 'Knowledge Intensive EIS Fund'
First let's just say that EIS investing is certainly not for everyone; it is very high risk and should never be done simply for tax purposes.
That said, there are hugely generous tax breaks when investing in EIS eligible companies. One of those benefits is that your income tax bill can be reduced by 30% of the amount you invest (i.e. a £100k investment could reduce your tax bill by £30k). Usually, investors don't have total control over the timing of an EIS investment but investing into a Knowledge Intensive EIS Fund allows the investor to claim tax relief in the current tax year.
So, for example, a person that knows that they have had a very high income in 2022/23 could invest prior to April 5th and ensure that the tax benefits are applied in the current tax year. This can be particularly useful if the investor has had, for whatever reason, an unusually high income in the current tax year.
Make an Intergenerational Wealth Transfer via a Junior ISA
Junior ISAs are for children aged under 18 and the annual allowance is £9,000 - which can add up to quite a lot of dosh!
They are fantastic for intergenerational wealth planning. For example, perhaps grandparents with a hefty inheritance tax liability might want to make a contribution to a grandchild's Junior ISA. A JISA can be rolled into an adult ISA on the child's 18th birthday thus giving the child a highly tax efficient head start to adult life.
Just like regular ISAs, the Junior ISA entitlement cannot be carried forward to future tax years and is therefore another 'use it or lose it' allowance.
How We Can Help
We routinely advise on the structuring of clients' assets including whether to use a Lifetime ISA, how much to contribute to a pension and whether EIS investments are a good idea. We can also manage investments on behalf of clients. Please get in touch if you think we might be able to help your investments grow over the long term in a tax efficient manner.
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