You might assume that all 2023-24 tax-free allowances and exemptions have vanished into thin air, but that’s not necessarily the case. How often have you come across the phrase "use it, or lose it" in articles about tax planning? As the tax year draws to a close, the message is clear: take advantage of your tax allowances before 6 April, or they will be lost forever.
While this is certainly true in many instances, it isn’t always the case. The UK tax system can be exceedingly complex, and there are certain circumstances where the "annual allowance" is more flexible than it appears at first glance.
Here’s a detailed look at three tax breaks you can carry forward into the new tax year, and three you definitely can’t.
What You Can Carry Forward
Your Pension Allowance Each year, you can contribute 100% of your income, up to a maximum of £60,000, to your pension and receive tax relief equivalent to your income tax rate. However, if you have the means, you might be able to contribute even more and still get the government top-up. The carry-forward rules allow you to utilise any unused pension allowance from the previous three tax years. This means the maximum you could potentially pay into your pension and receive tax relief on this year is £200,000 (two years with a £40,000 allowance and two at £60,000, including the current tax year).
To qualify, you must have had a pension in any year you are carrying forward, and you must have earned at least the amount you are contributing during the current tax year. These rules are quite prescriptive but can be advantageous for higher earners with fluctuating incomes or those who have received a windfall they wish to invest in a pension. They can also benefit high earners affected by the tapered annual allowance, which reduces the pension allowance once your adjusted income exceeds £260,000, potentially reducing it to as low as £10,000. By leveraging the carry-forward rules, you may still be able to contribute more.
It's also crucial to note that you lose the right to carry forward unused pension allowance once you make a taxable withdrawal from your pension and trigger the lower Money Purchase Annual Allowance (MPAA), currently £10,000.
Your Inheritance Tax Gifting Allowance Inheritance tax (IHT) can take a significant chunk out of the assets you leave to loved ones, charged at 40% on assets above a certain threshold. Giving away wealth before you die can reduce your IHT bill. Typically, cash gifts are considered "potentially exempt transfers," meaning they will be subject to a reducing rate of IHT over time, only becoming completely tax-free if you live for seven years. However, some gifts are automatically free of IHT.
Each year, the gifting allowance lets you give away £3,000 tax-free. This allowance is not entirely "use it or lose it." While you can’t carry forward unused allowance indefinitely, you can use any allowance not used in the last tax year. Therefore, if you didn’t use your gifting allowance last year, you can give away up to £6,000 this tax year. Couples can give up to £12,000 between them.
Capital Losses While it might be tempting to forget about investment losses, it’s wise to keep a record and report them to HMRC. They can be used to offset future capital gains, reducing your tax bill. Although the Capital Gains Tax (CGT) allowance cannot be carried forward, you can carry forward investment losses and offset them against future gains. If you have a bad year and incur more losses than gains, report them to use against future gains. HMRC allows you four years to report a loss.
‘Use It or Lose It’ Allowances
Capital Gains Tax Allowance Your CGT allowance, or annual exempt amount, is the gain you can realise each year tax-free. The allowance has decreased dramatically from £12,300 to just £3,000. This affects more ordinary investors. For example, an investor who makes moderate gains of £500 a year on a shareholding over ten years, resulting in a £5,000 gain, would have to pay CGT on £2,000 of their gain after deducting the £3,000 exempt amount.
To avoid this, you could take advantage of the annual allowance each year by selling portions of the shareholding to realise a gain, ensuring each sale doesn’t exceed the annual exempt amount. This way, no CGT would be payable.
Selling investments to use the CGT allowance doesn’t mean exiting the market. The 30-day rule prevents you from buying the same investment back immediately, but you can reinvest in something similar or diversify your portfolio.
The Dividend Allowance Investors pay tax on dividends as well as capital gains. The dividend allowance has been significantly reduced to just £500 a year. Tax is charged at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional rate taxpayers.
Married couples might avoid tax on dividends by transferring assets between each other, ensuring both allowances are utilised. Transferring assets between spouses can also be beneficial if one pays less tax. The best way to shelter dividends from tax is to use ISA and pension allowances where money can grow tax-free.
Your ISA Allowance Money in Individual Savings Accounts (ISAs) is completely tax-free. There’s no tax on interest or dividends, nor on withdrawals. It’s sensible to make the most of your £20,000 ISA allowance each year. Unused ISA allowances cannot be carried forward, but couples can shelter £40,000 a year between them.
If you’ve maxed out your ISA and have additional funds, you can contribute to a child’s or grandchild’s Junior ISA with a £9,000 annual allowance. If you have money in a General Investment Account (GIA) that could be subject to tax, you can sell holdings and immediately buy them back within a stocks and shares ISA using Bed & ISA rules, provided you have enough ISA allowance left and don’t trigger a CGT bill by selling gains that exceed your annual exempt amount.
Important Considerations
This information is for guidance only. Occasionally, third parties may offer opinions on whether to buy or sell specific investments. The content is not a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy. Investment values and income derived from them can go down as well as up, and you may not get back all the money invested. The investments mentioned may not be suitable for all investors; if in doubt, seek advice from a qualified investment adviser. Full performance details can be found on the company's or index summary page on the Interactive Investor website.
Remember, investment values can fluctuate, and you could receive less than you invest. If you’re unsure about the suitability of a stocks & shares ISA, seek independent financial advice. The tax treatment depends on individual circumstances and may change in future. If uncertain about the tax treatment, contact HMRC or seek independent tax advice.
Source: Interactive Investor
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