The 2021-22 tax year ends 5th April 2022, at this point, the 2022-23 tax year starts and most unused allowances – such as for your ISA – will disappear, together with the chance to potentially make substantial savings on your tax bill. Here at Vesta Wealth, we want to ensure that clients get the most out of their allowances and use their financial plan to get the best tax deal. Below, we consider how this all works and the difference it could make.
Why your allowances matter
Suppose you hold an investment portfolio which has generated capital gains of £40,000. At this time, you want to put down a mortgage deposit. So, you wish to sell this portfolio and convert it into cash. However, selling could result in a capital gains tax (CGT) bill – which for higher rate taxpayers, could amount to an £8,000 bill.
Using your allowances, however, could reduce this bill or even eliminate it entirely. First, you get a £12,300 annual CGT-free allowance. Assuming you have not used any of this tax-free allowance in 2021-22, you could shield this amount from CGT provided you sell before 5th April. This, alone, could reduce your bill to £5,540.
Let us take another example. A man’s wife has recently died – meaning he inherits all of her ISA allowance for the 2021-22 tax year. Combining this with his own ISA allowance would allow him to put up to £40,000 into, say, a Stocks & Shares ISA, where any capital gains, dividends, and interest earned is tax-free. However, failing to do this before the April deadline would result in the loss of his unused ISA allowance – along with that of his wife.
Over time, maximising your ISA allowances could amount to large tax savings. For instance, if you committed the current maximum of £20,000 into your Stocks & Shares ISA each tax year for ten years, this could represent a £200,000 portfolio completely free of CGT – even setting aside any investment growth in that time. These assets would not ordinarily be shielded from inheritance tax (IHT) in the event of your death, however with planning this could also be avoided by investing in an AIM portfolio which qualifies for Business Property Relief which is exempt from IHT.
A word on pensions
Another important allowance to consider is your annual pension allowance. This lets you, or your employer, contribute up to £40,000 to your scheme(s) each tax year. The great benefit of a pension is that the UK government will ‘top up’ your contributions with the addition of basic rate tax relief and if you are a higher rate taxpayer you may be able to obtain further tax relief.
This attractive scheme is limited by the annual allowance, however. You cannot put unlimited amounts into your pension at one time e.g., immediately prior to retirement upon sale of a business, yet there is more flexibility compared to your ISA allowance. Under the current pension rules, if you have previously paid into a pension but have not done so for several years, or paid limited contributions, you can utilise any unused pension allowance from the past three tax years to maximise tax reliefs available
For instance, suppose your allowance was £40,000 during each of these years and in the 2021-22 tax year, you could put up to £160,000 into your pension(s) before the 5th April. However, it is still important to not delay as the passing of 2021-22 may mean the loss of any unused allowance in the fourth prior tax year, missing the deadline could mean losing the chance to put another £40,000 into your pension(s).
Invitation
Maximising your allowances each tax year has the power to put £100s – perhaps £1,000s – back into your pockets via tax savings. This is all money that could be re-invested into your financial future (e.g., retirement fund) or put towards something you enjoy.
However, your allowances also need to be factored into your wider financial plan. For instance, if you are looking to sell a Buy to Let property in the coming years, it might make sense to focus more of your equity investing within your ISA. Then, when the time comes to sell your property, your CGT tax-free allowance for the year can be applied to the profits you hope to make. If you also then need to sell equities within your ISA in the same tax year, then you do not need to worry about this counting towards your CGT allowance.
If you would like to discuss making the most of your allowances, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.