Making the most of your tax breaks in 2024

From annual exemptions on capital gains tax (CGT) to inheritance tax (IHT) gifts, putting this raft of tax breaks into action can be a bit of a chore, but they can make a fantastic difference to your future wealth.

If you don’t want to miss out on the opportunity, get started now and give yourself the best chance to get organised.

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Saving and investing

To avoid paying tax on money you’re saving in cash or investment accounts, it’s important you take advantage of individual savings accounts (ISA). This will ensure your money is sheltered from tax as it grows and there won’t be any tax to pay when you take it out either.

This year there haven’t been any changes to the ISA allowance – you can still invest a total of £20,000 across the different types of ISA. Children have their own ISA allowance which remains at £9,000 this year.

However, this April did see the introduction of a handful of rule relaxations which – while not revolutionary – could add flexibility to your financial planning.

For the first time you can now pay into more than one ISA of the same type, each year, making it easier to keep your savings in different pots. So, for example, you could pay into an easy access ISA – for emergency savings – and a fixed-rate ISA for cash you can lock away for a year or more.

April also saw the end of “all or nothing” transfer rules. It’s now possible to transfer part of an ISA, without moving the whole lot. In particular, this will make it easier for people to move money between cash and stocks and shares ISAs.

A person with £15,000 in a cash ISA, for example, might decide they have more than they need in cash, and transfer £5,000 into a stocks and shares ISA. Alternatively, an investor with £100,000 in a stocks and shares ISA, might move £10,000 into a cash ISA to cover an upcoming expense, or to reduce risk in their portfolio.

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The latest changes to the CGT and dividend tax allowances have increased the importance of sheltering wealth in tax wrappers such as ISAs.

This April, the CGT allowance was cut from £6,000 to just £3,000 (from a high of £12,300 two years ago). The dividend allowance has halved too from £1,000 to £500 this year.

If you have equity-based investments in a general investment account (GIA) that aren’t sheltered from tax, it is possible to sell them and immediately re-buy them within a stocks and shares ISA in a process known as Bed & ISA.

You just need to ensure you have enough ISA allowance remaining and that the amount you sell doesn’t see you breach the CGT allowance. For larger gains, it may make sense to move the money into an ISA gradually, over a number of tax years.

Alternatively, if you want to boost your retirement finances you can use similar Bed & SIPP rules to move taxable investments into your pension.

Don’t forget the personal savings allowance means you can earn some interest from non-ISA cash accounts before you need to pay tax. Basic-rate taxpayers can earn £1,000 in interest before they pay tax on it, dropping to £500 for those that pay higher rate. Additional rate taxpayers (those who earn more than £125,140) don’t get an allowance.

Assuming the money is held in one of the top easy-access accounts a basic-rate taxpayer will start paying tax on interest as their balance edges towards £20,000, compared to just under £10,000 for higher-rate tax payers.

Retirement planning

When it comes to retirement saving, the tax breaks on pensions are unrivalled, so it makes sense to pay in as much as you can.

The pensions allowance is currently 100% of your earnings, up to a maximum of £60,000 a year, after it was increased from £40,000 in April 2023. But, if you are in a position to pay in more than that this year, you might be able to.

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Carry forward rules allow you to pay unused pension allowance from the last three tax years. That gives savers with cash to spare, up to £200,000 to pay into their pot this year (up from £180,000 in 2023-24). The catch is that you need to have earned the total value of your contribution in the current tax year.

This won’t be an option for everyone, but it can come in handy if you have a windfall or a fluctuating income and need to make up for lost time.

Some savers, however, will have a lower pensions allowance.

If you’ve already made a taxable withdrawal from your pension, you will have triggered the money purchase annual allowance and will only be able to pay in £10,000. You’ll also no longer be able to use carry forward rules. This means it’s important to think carefully before taking a taxable lump sum out of your pension while you’re still contributing.

The highest earners will have a lower allowance too. The tapered allowance kicks in when you have an ‘adjusted income’ (your income plus your employer pension contributions) over £260,000 and gradually reduces the amount of money you can pay into a pension each year. The allowance will only stop dropping once it reaches £10,000 – for those earning £360,000 a year or more.

Streamlining your estate

Bereaved families are paying more IHT than ever. Receipts hit £7.5 billion in the last tax year.

The tax is payable at a rate of 40% on estates worth over £325,000. However, many people can pass on more than that tax free. If you are passing on a family home, for example, you can pass on a further £175,000 giving a total tax-free estate of £500,000.

Nonetheless, rising house and asset prices, in conjunction with frozen allowances mean increasing numbers will die with taxable estates.

One of the most straightforward ways of reducing the amount of tax you pay is to give money, that would otherwise be taxable, away before you die.

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Gifts are considered to be potentially exempt transfers – which means tax may still be payable on them, depending on when you die. For gifts that exceed £325,000 a gradually reducing rate applies over time, but you need to survive seven years for gifts to become totally tax free.

However, each year, everyone can give away £3,000 IHT free, known as the annual exemption. It might not sound much if you’ve got a big liability brewing, but used over the years it can take a significant chunk out of your estate and give you the pleasure of helping out loved ones.

It’s also worth noting that, if you didn’t use last year’s exemption, you can still use it this year. That means a couple gifting for the first time can give away £12,000 in 2024-25 between them.

Make sure you don’t give away money you might need in later life though. And if you are parting with serious sums, it usually makes sense to take professional advice.

The power of joining forces

If you’re married, or in a civil partnership, it’s important to be aware that you can effectively double your allowances by joining forces and thinking about which assets go in which name.

Married couples, for example, can transfer assets between each other without paying tax, making it easier to take advantage of both sets of CGT and dividend allowances. And, even if tax can’t be avoided altogether, you might still be able to cut your tax bill by transferring assets to your spouse, if they pay less tax than you.

Similarly, couples, whether they are married or not, can shelter up to £40,000 of wealth from tax in an ISA each year or save up to £120,000 in pensions a year between them. But, just be aware that if you aren’t married and are transferring assets to a partner or investing in one of their accounts, you won’t have the same degree of legal protection if you separate.