07 Mar 2023
Lumin Wealth’s Managing Director, Martin Cotter, highlights the importance of optimising valuable, tax-efficient allowances ahead of the end of the tax year.
Using annual allowances and tax wrappers effectively forms the backbone of a robust financial plan. Many of these valuable allowances operate on a ‘use it or lose it basis’. You can save thousands of pounds in the short term, and substantially improve financial outcomes over the long run.
Pension annual allowance
The standard pension annual allowance, the maximum amount that can be contributed into a pension and benefit from tax relief, is £40,000 or 100% of your net relevant earnings (NREs) up to the annual allowance. Contributions for non-earners are limited to a maximum of £3,600. Pension contributions can be particularly attractive for high earners, especially those earning between £100,000 and £125,140, who can receive an effective rate of 60% tax relief on their pension contributions.
Savers may be able to increase tax-incentivised pension contributions by carrying forward unused annual allowances from the three previous tax years. You must use the annual allowance in the current tax year first, before using carry forward from prior years.
Depending on their previous annual contributions and current income tax liability some savers may be able to contribute a possible £160,000. However, carry forward from 2019/20 has to be used in the current tax year, or it will be lost forever.
ISA annual allowance
You can pay a maximum of £20,000 per year into an ISA (or £40,000 if a couple were to use both their allowances). It’s always prudent to maximise stocks and shares ISA contributions before paying into a general investment account, as investment gains are free from income tax and capital gains tax, and the annual allowance can’t be carried over.
Capital gains ‘harvesting’
Capital gains tax is a tax on the profit when you sell, or dispose of, an asset that has increased in value. This includes investment portfolios where basic rate taxpayers pay 10% tax on their investment gains, while higher and additional rate taxpayers pay 20%.
Each adult currently benefits from a capital gains tax annual exempt amount of £12,300, although this is set to be cut to £6,000 from April 2023, and to £3,000 in April 2024.
ISA vs. pension considerations
Making full use of available allowances allows you to optimise your finances and save on taxes. It’s important to consider the interplay between pensions and ISAs, as there are some key differences. For example, pensions do not form part of the estate for inheritance tax
(IHT) purposes, whereas ISAs may be subject to IHT, unless left to a spouse/civil partner.
We’d be delighted to discuss your financial planning needs over a coffee. Do feel free to email me on martin.cotter@luminwealth.co.uk, or call the office on 01727 893 333. You can also find out more at luminwealth.co.uk.
