The start of each tax year brings a new set of tax allowances and is traditionally a time when investors take stock of their existing arrangements and look for planning opportunities. The series of measures announced in the Budgets in November and last month herald some significant changes that will now come into effect, with a number of potential planning opportunities to consider.
A range of new pension legislation comes into effect from 6th April, and provides significant opportunities for individuals looking to accumulate their pension pots, anyone whose pensions are close to the Lifetime Allowance, or indeed those who have already begun drawing a pension flexibly.
The pension Annual Allowance, which is the maximum that an investor can contribute to a pension each tax year, has increased from £40,000 to £60,000. It is important to remember that any contributions made are always capped by the level of relevant earnings (salary or self-employed income). The new allowance of £60,000 provides much greater scope for individuals to make a higher level of contribution, and in particular, provides a valuable opportunity for Directors to arrange substantial Employer Pension contributions.
Anyone who has flexibly accessed a pension in the past, has seen the limit for further pension contributions limited to just £4,000 each year, as they are subject to the Money Purchase Annual Allowance. This allowance has been increased to £10,000 from 6th April 2023, and provides scope for those returning to work after taking retirement to make a more meaningful level of pension contribution.
The biggest single change in the March Budget was the announcement that the Lifetime Allowance for pension savings is to be scrapped. In the 2023/24 tax year, this allowance remains in place; however, the tax charge for breaching the Lifetime Allowance has been reduced to 0%. The level of Tax Free Cash available when taking a pension hasn’t been increased, but the removal of the punitive tax charge for breaching the Lifetime Allowance provides new opportunities for those wishing to pay more into their pensions, or for anyone with pension savings above the allowance, to draw more out of their pension. As ever, planning around these areas can be complex, so we recommend speaking to one of our experienced independent financial planners for advice.
Investment tax changes
Anyone who holds investments outside of an Individual Savings Account (ISA) should look to consider how tax efficient their portfolio is, as changes to the taxation of dividends may lead to more individuals paying tax on their dividends. The Dividend Allowance, which covered the first £2,000 of dividends in the 2022/23 tax year has been halved to just £1,000 for 2023/24 and a further halving of the allowance will follow in the 2024/25 tax year.
Consider the position of an individual who holds £30,000 in investments (either directly held stocks or Unit Trusts) outside of an ISA, that generate a dividend yield of 4%. In past tax years, the Dividend Allowance would have easily covered this income, thus avoiding any tax liability. With the smaller allowance now in place, this would mean that £200 of the dividend income would be subject to tax at 8.75% for a basic rate taxpayer, or 33.75% or 39.35% for a higher or additional rate taxpayer respectively.
By placing the investments inside an ISA, dividends would be tax free; however, investors need to be even more careful to consider the Capital Gains Tax (CGT) consequences of any actions taken, as the CGT allowance has more than halved from £12,300 to just £6,000 in the new tax year.
The start of a new tax year is also an ideal time to consider the existing investment strategy, and if you hold investments that have not been reviewed for some time, now would be the ideal opportunity to overhaul an existing portfolio.
Whilst the amount we can earn in a tax year before paying Income Tax hasn’t changed, more people may well find themselves subject to Income Tax on their earned income, or from pension sources, from the start of the new tax year. Pensioners in particular need to pay attention to the impact of the 10.1% increase to the State Pension coming into effect, on the amount of Income Tax they could pay on other income, such as private pension or investment income.
Other tax traps exist, including the lowering of the starting point where Additional rate Income Tax is paid. The reduction from £150,000 to £125,140 will mean that higher earners will end up paying an additional 5% Income Tax on income between £125,140 and £150,000. Coupled with the taper on the Personal Allowance (which isn’t new, but is nonetheless painful) this is the ideal time for higher earners to take stock of their financial position and consider planning opportunities to reduce their tax bill.
Take a holistic view
We have outlined just a handful of the most important changes that come into effect from 6th April, but there are more that should be considered, depending on your particular circumstances. This is where holistic financial planning can provide significant value, in assessing the bigger picture and taking into account your personal circumstances to look for ways to improve tax-efficiency and streamline investment strategies. A conversation with one of our experienced independent planners could well help identify changes that take full advantage of the new opportunities.
To discuss the above in more detail please contact one of our experienced advisers here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.