The tax year is soon to come to a close, and with it, any allowances that may have gone unused. This year is possibly the most important of recent times as a number of important tax changes are coming into force from 6 April 2023. Time is running out to use allowances and give your wealth the best prospects for the year ahead.

Here are the key changes you should be aware of, and where to maximise your allowances before they’re gone forever.

Dividend allowances

The dividend allowance is being slashed in half from 6 April to just £1,000. This will then be halved again from April 2024 to just £500. Above this allowance you pay dividend tax on any earnings. Dividend tax is calculated at 8.75% for basic rate payers, 33.75% for higher rate and 39.35% for additional rate payers, potentially taking a big chunk out of any income that isn’t protected by a tax wrapper.

Where possible to bring forward the taking of a dividend, for example out of a profitable business you have a share in, it is essential to max out this allowance or else face paying tax on those earnings from April.

Capital Gains Tax allowance

The Capital Gains Tax (CGT) allowance is currently set at £12,300 but this is being more than halved to just £6,000 from 6 April. From April 2024 this is going to be slashed even further to just £3,000. Maximising the CGT allowance this year is therefore crucial. You pay CGT when you dispose of an asset that has grown in value, including stocks and bonds, property (that isn’t your primary residence) or even personal possessions such as jewellery, paintings or antiques.

This means if you have any assets that you were considering selling to cash in on the growth gains, then the allowance should be used now before it is effectively gone. This is relevant for assets held outside of a tax efficient ISA or pension as those assets inside these accounts won’t be liable for CGT.

Inheritance and income

Both inheritance tax (IHT) and income tax aren’t having any changes to their allowances or thresholds per se, but the thresholds have been frozen. This means if you receive a pay rise, or assets inside your estate rise in value, then you’ll see less benefit from those increases in earnings or value.

In order to mitigate the worst effects of the threshold increases, then for IHT it can be a good idea to bring forward some gifting where possible as you get £3,000 a year to gift without IHT liability. You can carry forward this allowance but only for one tax year – so if you haven’t given a gift in either 2021/2022 or 2022/2023 then you could potentially gift away up to £6,000 before 6 April. If you are married, then combined this could be as high as £12,000 over two tax years.

Use your ISA allowance

The ISA is one of the least complicated investment vehicles for our long-term wealth and one of the most generous is tax-exemption terms. The allowance is £20,000 a year, it can’t be carried forward, and anything inside the ISA is protected from any form of tax including the aforementioned CGT and dividend allowances. This makes the ISA allowance extremely valuable in wealth planning terms and should be taken advantage of where possible.

If you’re looking to mitigate CGT, for example, you can use a method called ‘bed and ISA’. This is where you own assets such as stocks or bonds outside the ISA wrapper – you sell those assets then use the cash to rebuy inside the ISA, effectively inoculating your money from tax liabilities.

Investors are prohibited from buying back assets within 30 days of selling them under CGT rules (in order to prevent gaming of the system), but there is an exemption if you sell them outside an ISA then reacquire them within one. If you have assets outside an ISA, and unused CGT and ISA allowance, then it’s a no-brainer to do this to save on hefty tax liabilities. If you have children under 18 and you’re considering strategies for passing some of your wealth on to them, a Junior ISA (JISA) can be a great product to kick-start this too. Unlike a regular ISA, the JISA has an annual contribution limit of £9,000.

Take advantage of pensions allowance

Pensions allowances are also very generous, with up to £40,000 per year available (assuming you haven’t triggered the money purchase annual allowance), plus tax relief on anything you put in. The tax relief is perhaps the most attractive aspect of a pension as it means you have more money to start with than an ISA as you’re bypassing income taxes using the relief.

However, pensions have more tax implications when it comes to withdrawal which are worth discussing with an adviser where possible.

Now is the time to take advantage of left-over tax allowances that you have yet to use.  We are here to advise you, so please get in touch.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st February 2023.