Tax year-end planning

An Individual Savings Account (ISA) is a simple savings plan that offers tax-free income and gains, and no tax on withdrawals. There is one for nearly every saver and today the ISA is still regarded as one of the best places to make the most of your cash.

The subscription limit for 2023/24 is £20,000 per person and you can split this between a cash ISA and a stocks and shares ISA. The ISA allowance limit of £20,000 will remain the same for 2024/25.

You must be 16 or over to open a cash ISA, and 18 or over to open a stocks and shares ISA. You also need to be UK resident in the tax year to open the account or pay into it.

If you haven’t used your maximum allowance yet make sure you top up before 5 April 2024 as your allowance doesn’t roll over to the next tax year.

Tip: Most people should have an ISA, even if it’s just a basic cash ISA to dip into when you need some cash. You should look around and compare cash ISA rates each year. If you wish to leave your money there for a few years, consider a stocks and shares ISA instead.

Any UK resident aged 18 to 39 can open a Lifetime ISA (LISA) and you can continue to pay into it until age 50. Savers can contribute up to £4,000 per tax year and the Government will then add a 25% bonus at the end of each tax year in respect of the contributions paid, meaning you could earn an additional £1,000 of tax-free cash annually.

The maximum bonus that could be achieved if opened at age 18 and with maximum contributions could be as much as £33,000, (£32,000 if you happen to be born on 6 April). If you also obtain growth on the LISA, e.g. using a 5% growth rate each year, the bonuses could add £79,000 to your savings compared to a standard ISA.

If you withdraw your capital from the LISA before age 60, other than to buy a qualifying first home or in exceptional circumstances such as terminal illness, you will have to pay a 25% penalty that’s applied to the total amount.

Tip: You can split your £20,000 ISA allowance: £4,000 into the LISA and the remaining £16,000 into a cash or stocks and shares ISA.

Any ISA other than a Junior or a Lifetime ISA may allow you to withdraw and replace money from your ISA at any time during the same tax year. This isn’t a special kind of ISA but a facility that the ISA provider may make available.
If you have taken money from your Flexible ISA, you can replace it within the same tax year without affecting your £20,000 subscription limit.

For example, if you have £30,000 in an ISA, you could withdraw up to the full £30,000 and repay it to the ISA within the same tax year. You would still be able to pay in a further £20,000, so could have £50,000 in your ISA by the end of the tax year.

Not all ISA providers offer this flexibility, so it is really important that you check that this facility is available before making any withdrawals. If your current provider doesn’t offer it, you could consider transferring to a provider that does.

An Innovative Finance ISA (IFISA) lets you save with peer-to-peer lenders or invest in companies through crowdfunding websites.

An IFISA works by lending your money to borrowers in return for a set amount of interest based on the length of time you are prepared to leave your money untouched.

You can only pay into one IFISA in each tax year, but you can also pay into a cash ISA and stocks and shares ISA as long as you do not exceed your ISA allowance (currently £20,000).

Anyone whose spouse or civil partner has died while holding an ISA can make arrangements to take over those ISA savings without losing the tax benefits. This allowance is known as an ‘Additional Permitted Subscription’ (APS).

This is in addition to any other ISA savings they may make and is not subject to the £20,000 annual investment limit or any other form of cap.

The allowance must be used within three years of the date of death, or 180 days from the completion of the administration of the estate. If you have cash of your own, you don’t have to wait for probate.

This allowance is not that well known so do take advice if you think you are eligible.

The Junior ISA (JISA) can be opened by a parent or guardian for anyone under the age of 18 who lives in the UK and the annual limit is £9,000 in 2023/24. This allowance has been frozen for 2024/25.

There are two types of JISA: a cash JISA, a savings account where there is no tax on the interest on the cash saved; and a stocks and shares JISA, where the cash is invested and there is no tax on any capital growth or dividends received.

Usually, parents have to pay tax on income generated on money gifted to their children, but income generated from these savings to not have to be declared on the tax return. So it is an efficient way for parents to save for their children.

Tip: A JISA is a great tool to get your children involved in and teach them financial and savings literacy, helping prepare them at an early age on how to use their savings wisely.

Many can earn interest on some savings without paying tax. The first £1,000 of interest earned on savings has been tax-free for basic rate taxpayers (£500 for higher rate taxpayers) since 6 April 2016.

Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gifts is covered. This includes interest earned on other currencies held in UK-based savings accounts. This is extremely beneficial as a basic rate taxpayer could have £25,000 of savings in an account paying 4% per annum and pay no tax at all on the interest received.

Note, additional rate (45%) taxpayers do not benefit from this tax-free allowance.

Tip: You can use your Personal Savings Allowance in combination with ISAs to generate tax-free interest.

• Basic rate taxpayers over the PSA limit – For every £100 interest you earn in normal savings, you only get to keep £80, whereas in an ISA you will keep the full £100.
• Higher rate taxpayers over the PSA limit – For every £100 interest you earn in normal savings you only keep £60, whereas in an ISA you get to keep the full £100.
• Top rate taxpayers – For every £100 interest you earn in normal savings you only keep £55, whereas in an ISA you keep the full £100.

Dividend Allowance

• Dividend income is taxed as dividend income rates, which increased by 1.25 percentage points with effect from 6 April 2022. There are four possible rates of tax that can apply to dividend income received from 2022/23 onwards: the dividend nil rate of 0%, the dividend ordinary rate of 8.75%, the dividend upper rate of 33.75% or the dividend additional rate of 39.35.%.
• The dividend nil rate band was reduced to £1,000 for the 2023/24 tax year and will be further reduced to £500 for the 2024/25 tax year.

Individuals have a Capital Gains Tax (CGT) free allowance of £6,000 in 2023/24. This allowance will be halved in 2024/25 to £3,000. 

The rate of CGT you must pay depends on your unused income tax bracket and the type of asset you sell. It’s important to note that residential property commands a higher rate of CGT.

The marginal rates of capital gains tax for the 2023/24 tax year are as follows:

If you haven’t used your CGT allowance for 2023/24, are there any assets that could be sold before the 6 April 2024? If you have used up your allowance, consider deferring selling assets until the next tax year.

If your spouse is a basic rate taxpayer, gains realised by them may attract tax at the lower 10% CGT rate (with the exception of residential property at 18%) to the extent of the unused income tax basic rate band and they may also have unused CGT annual exemption.

The use of capital losses must also be considered carefully as there are circumstances where the use of a loss is restricted or expanded.

Tip: If you have substantial investments, seek advice to understand if it is possible to restructure these so that they produce either a tax-free return or a return of capital taxed at a maximum of only 20% under CGT, rather than income tax at up to 45%.

The Annual Allowance is the limit on how much someone can build in tax-efficient pension benefits in each tax year. For most, this Annual Allowance is £60,000 for the 2023/24 tax year, having been increased from £40,000 the year before.

It is possible to build more pension benefits than the Annual Allowance in a tax year by using ‘Carry Forward’ to utilise unused allowance from previous tax years. Carry forward rules allow you to utilise any unused annual allowance going back three years, including both personal and employer contributions.

To take advantage, you must have been a member of a pension scheme during the tax year from which you intend to bring forward the allowance. The standard Annual Allowance in the previous three tax years was £40,000.

Personal “tax-relievable” contributions are also limited to the greater of £3,600 gross per annum, or 100% of your relevant UK earnings, in the tax year that the contribution is paid. So it’s important to understand whether you’re looking to make a personal contribution or if your employer is looking to pay in on your behalf. You might have enough Annual Allowance, but you may be limited by your earnings on how much you can pay in.

If you exceed your Annual Allowance, the excess will be taxed at your marginal rate of income tax. E.g. if you are a 45% taxpayer, the Annual Allowance Tax Charge will be at a rate of 45%. It’s therefore important that you do not unnecessarily exceed your allowances.

Your annual allowance in 2023/24 is tapered if your ‘Adjusted Income’ in the year exceeds £260,000, losing £1 of allowance for every £2 of Adjusted Income above £260,000. The minimum annual allowance is £10,000 for the 2023/24 tax year, which is reached when your Adjusted Income exceeds £360,000.

The rules around the Annual Allowance and Tapered Annual Allowance have changed multiple times since they were introduced, and you need to be aware of what the rules were on annual limits for each tax year you are looking to carry forward any unused allowance from. It is a complicated area, and we would encourage anyone looking to carry forward unused allowances to take proper advice.

Tip: If you’re unable to contribute to your pension in this tax year but want to save towards your retirement, think of setting up a pension scheme now (before the end of the tax year), even with a small amount such as £100.

The carry forward rules stipulate that you must have been a member of a pension scheme on a particular date. Even with a modest amount, becoming a member of a pension scheme will allow you to use carry forward allowance in future tax years. A contribution of £100 this year means that in the next tax year 2024/25 you could have a £406000 allowance for that year plus a carry forward allowance from 2023/24 of £59,900.

This is particularly useful for the self-employed, but a lot of senior employees/directors still do not have any form of pension provision and have even opted out of auto-enrolment schemes. Membership of such a scheme would qualify as a registered scheme and open the carry forward provisions for later years. 

In the past when someone aged 75 or over died, their pension fund could be given to anyone with a one-off tax charge of up to 55%.

Since 6 April 2015, the individual inheriting the pension fund pays tax at their personal marginal rate on any money withdrawn from the pot. In effect, tax could be payable at a rate as low as 20% or even nothing if the income is covered by their personal allowance.

However, some older pension schemes don’t allow the full payment flexibility and may force the person who inherits to receive the cash as a lump sum. This could push the recipient into a higher tax bracket. If the owner of the pension pot dies before they are 75, the funds can be passed onto beneficiaries tax-free whether the fund has been touched or not.

Tip: Consider maximising your own or your family’s pension contributions rather than giving away cash to mitigate IHT, assuming the contributions are made to your pot. This can give you the advantage of reducing your estate through “normal expenditure out of income” and keeping funds available to draw on later.

Up to 25% of a pension fund can normally be taken as tax-free cash, however, if you don’t need it up front, you can often draw it in stages. This is known as ‘phasing’ to give more tax-free ‘income’ each year, blending it with taxable income to use allowances effectively.

Of course, it’s possible to just take tax-free cash to meet expenditure needs in the early years, for example, paying off your mortgage when you retire. However, it’s important to consider not just what results in the least amount of tax today, but the impact on tax due in the future. 

As part of a wider IHT planning strategy, individuals could make use of their IHT annual exemption of £3,000. This allows individuals to make gifts up to £3,000 each tax year without paying IHT, any unused annual exemption amount may be carried forward to the following tax year.

Every individual subject to IHT is currently entitled to a ‘Nil Rate Band’ of £325,000 (the government have frozen this threshold until 2028) on death. This means that only the excess is taxed at the usual rate of 40%. There are many other reliefs and allowances to consider for IHT planning however there is much debate as to the future of IHT and this could be a key part of any manifesto ahead of the next general election. 

Tax residency in the UK is determined by the Statutory Residence Test on a tax year basis. The test may look at the number of days you have spent in the UK, where you performed your work, where you had a home and your ties to the UK such as where your family lived. If you spent, or intend to spend, more than 16 days and less than 183 days in the UK in a given tax year, you may need to consult the Statutory Residence Test to determine your tax residence for a given tax year which will underpin how you are taxed in the UK. The rules are complex and careful application to your personal circumstances is important.

If you are planning to leave or arrive in the UK in the 2024/25 tax year, careful consideration of the Statutory Residence Test and the impact of UK or non-UK tax residency is highly recommended so that tax-efficient planning can be implemented ahead of time.  

UK tax resident non-domiciled individuals may decide to claim the remittance basis to avoid being taxed on their worldwide income and gains on an arising basis. An individual can decide whether to claim the remittance basis on a tax year basis and should consider the claim in the context of the potential remittance basis charge and their particular circumstances.

Under the non-domicile tax rules in the UK, an individual may become deemed domicile in the 2024/25 tax year if they have been a UK tax resident since the 2009/10 tax year. There may be a significant tax impact to becoming deemed domicile in the UK and individuals should consult their adviser to review the income tax, capital gains tax and inheritance tax implications.