The all important date to know is the 5th April. Every year on this date, one tax year ends and the next begins. So for example, the 2022/23 tax year ends on the 5th of April 2023, and the 2023/24 tax year starts on the 6th of April 2023. This is an important moment in the calendar because many allowances need to be used within the tax year, and if you don’t use them, you may very well lose them.
What are allowances though? Let's break down the various allowances and why they're important. Note that the specifics of allowances can change every tax year depending on government decisions, so make sure you double check figures!
Use your ISA allowance
First up is the all important ISA allowance. Every tax year you have an ISA allowance that currently stands at £20,000. You can invest up to this amount, every tax year, and all growth, dividends and interest within the ISA are tax-free. So, if your investment grows, and you withdraw the money, there is no tax to pay. Amazing! This is undoubtedly one of the easiest allowances to make use of to prepare for the end of the tax year. Even more so as once the tax year is over, the ISA allowance refreshes. That means that on the 6th April, you’ll have another £20,000 that you can put into ISAs again. If you don't make use of it, you lose it, so see what you can squeeze into your ISAs before the deadline date.
Use your kid’s ISA allowance
Anyone who is over the age of 18 in the UK has a £20,000 allowance to use across stocks & shares, cash, lifetime and innovative finance ISAs. Children under the age of 18 can also have their own ISA, known as a Junior ISA (or a JISA if you love an acronym) as long as it is set up by a parent or guardian. Each tax year, they have a £9,000 allowance that can be added to the JISA to save for their futures. Much like the ISAs for adults, if this annual allowance isn’t used, it is lost. If you’ve got more than one child, they can have one JISA each, which means that if you’ve got two children, you’ve potentially got £18,000 in extra tax free savings allowance.
Max out your pension contributions
Another important allowance to make use of is pension contributions. There are many benefits to making pension contributions, many of which revolve around the all important end of tax year. The big one to take note of is that of savings within a SIPP (Self Invested Personal Pension) or within an employer pension. For both of these you have no tax on the way into the pension and any growth on investments within the pension is tax free.
Currently the tax free limit on paying into your pension is up to £40,000, or the total amount of your earnings depending on which is greater. For example, if you’ve earnt £30,000 this year, you can only put a maximum of £30,000 into a pension with tax benefits. When making these contributions with your employer, they will automatically be reclaimed by your HR department or payroll. However if you’re making personal contributions, you may need to complete a tax return to be able to receive 20% tax back from the government. This is basically free money so well worth doing!
If you're a higher or additional rate taxpayer, you can claim further tax relief on your pension contributions, whether they’re employer or personal, from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief. This can help to boost the funds that you will receive if you get the documents completed by the end of the tax year.
5th April. Put that crucial date in your calendar.
Crucially, by using up any spare allowances on your tax returns before the end of the year, you’ll be taking advantage of tax free growth within a protected pension structure. Whilst you can roll pension allowances forward by up to three years - after this, the allowance is lost. So crack on, and start using those pension allowances before the end of the tax year.
Squeeze out any last savings interest
Everyone in the UK has what is called ‘Personal Savings Allowance’. Do you receive interest on your savings whilst it's in the form of cash in the bank? If you do, you can potentially receive some tax-free. If you are a basic rate taxpayer, (i.e. earning less than £50,000 per year), you can receive up to £1,000 in interest that is tax-free.
If you are a higher rate taxpayer (earning between £50,000 and £150,000) you can receive £500 tax-free. Additional rate taxpayers do not receive an allowance so this won’t be applicable to them. However, if you’re earning under £150,000 then now is the time to see if you can maximise your interest savings before the end of the tax year.
Strategise your dividends allowances
If you’re holding investments in stocks or funds, then you may well be receiving dividends. In the UK you can receive up to £2,000 (2022/23). This is actually going down to £1,000 in the 2023/24 tax year and again further down to £500 in 2024/25. Whilst it might not be in your control how and when you receive dividends, now is the time to look at stocks with ex-dates. If you are nearing the tax deadline and have unused dividend allowances, it might be savvy to think about your stocks and any potential dividends that you could receive before the tax deadline.
Allocate capital gains or losses
If you own stocks, or any other type of investment, you may also be familiar with the capital gains tax. As a tax that is levied on the profit you make when you sell something that you own. If it’s sold at a profit, then you’ve got a capital gain. If it’s sold for a loss, then, you guessed it, it’s a capital loss.
For example, let's say you bought an amazing piece of art for £10,000 twelve years ago that is today worth £100,000 and you want to sell it. However it has increased in value, by £90,000, which means you’ve got a gain of £90,000.
Everyone has a capital gains allowance per year of £12,300 (2022/23). This allowance will be falling to £6,000 per year for the 2023/24 tax year. Any gains under this allowance will not be taxed. If it’s likely that you could make some gains, it might be wise to time them with allowances for each tax year.
On top of the allowances there is extra good news: you can deduct losses. So if your artwork from above has a £90,000 gain, but you’ve got another investment that you’ve sold at an £80,000 loss, you can deduct the loss. Your total gain for the tax year in this example would therefore be £10,000, which in the 2022/23 tax year would be below the limit. As a result, to prepare for the end of the tax year, it’s also worth crystallising any losses that might be worth deducting to bring you back within the limit.
The bottom line
Believe it or not, the tax system in the UK, at the moment, is well catered to accommodate investors. We have pensions, ISAs and various investing allowances that all give us various opportunities to have tax free gains. To fully prepare for the end of the tax year, make sure you’re clued up and make sure you use them!