01 Mar 2025
Many savers are facing a heavier tax load, in light of recent tax changes. This makes it more important than ever to make full use of existing tax shelters before April 5.
The Autumn Budget spelled bad news for savers, with many families and small business owners set to face a number of tax hikes.
In addition, certain key tax thresholds remain frozen. With tax bands failing to rise in line with inflation, more households are falling victim to ‘silent taxation’.
This unfavourable tax environment places more onus on using existing annual allowances and exemptions effectively. This article highlights some key tips that you could consider applying before the tax year ends on April 5.
Optimise your pension annual allowance
Contributing to a pension plan annually can significantly reduce your taxable income.
Most UK workers (except for the highest earners) can pay up to £60,000 into their pension annually and benefit from tax relief on these contributions. This can be a really tax-efficient way of building wealth.
Tip: If you have unused annual allowances from the three previous tax years you may be able to contribute a larger sum via the ‘carry forward’ rule.
Carry forward can be particularly beneficial for small business owners, who can extract company profits in a tax-efficient manner.
Investment ISAs offer tax-free gains
Like pensions, ISAs are a key part of tax-efficient wealth building. UK adults benefit from an ISA allowance of £20,000, with any interest or gains shielded from tax (in contrast to taxable general investment accounts).
Cash ISAs remain more popular with savers, especially in light of the favourable interest rates seen over the past couple of years.
However, over the long-term an investment ISA offers greater potential for growing your wealth, if you can tolerate the natural ups and downs that are a part of long-term investing.
Tip: The ISA annual allowance can’t be carried over into a new tax year, so it must be used before April 5.
Harvesting investment gains
The annual capital gains tax (CGT) exemption currently stands at just £3,000. This places even more emphasis on optimising ISAs and pensions, where any investment gains are exempt from tax. In the case of any taxable investment accounts it’s a good idea to ‘harvest’ gains in each tax year and apply your annual CGT exemption,
rather than letting gains build up and facing a larger tax charge down the line.
Tip: A professional investment management team can implement annual capital gains harvesting, to ensure this ‘use it or lose it’ allowance is being appropriately applied before the end of each tax year.
Taking proactive steps to reduce your tax bill is an important part of a robust and long-term financial plan.
By doing the basics well you can substantially improve long-term financial outcomes and your retirement
prospects. Find out more by calling 03300 564 446 or get in touch via our contact form.
