As the end of the tax year fast approaches, savers and investors are being urged to make the most of their tax-efficient allowances before the reset.
Most personal tax thresholds are frozen until at least 2028, meaning millions of Brits will be pushed into higher tax bands this year.
With the 2024-25 tax year ending at midnight on 5 April, here’s a checklist of seven strategies by Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, to ensure your savings and investments remain as tax-efficient as possible:
The Individual Savings Account (ISA) allows savers and investors to shelter up to £20,000 in tax-free investments, including cash or stocks. However, this allowance resets on 6 April, so any unused portion will be lost. Haine suggests that investing in an ISA is a great way to grow wealth without being hit by taxes on income and capital gains.
Haine says: "ISA savers have some additional flexibilities to take advantage of this tax year. This includes being able to subscribe to multiple ISAs of the same type (bar the Lifetime ISA and Junior ISA), such as multiple Stocks & Shares ISAs or multiple Cash ISAs and being able to make partial transfers from an existing ISA to another provider."
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To make the most of this tax-free allowance, consider opening a new ISA or topping up an existing one. For those uncertain about investments, opening an investment ISA with cash and gradually moving funds into the markets over time is a valid option.
Contributing to a pension not only helps secure future retirement income but also reduces your income tax liability. The UK government provides tax relief at your marginal rate, so basic-rate taxpayers receive 20%, while higher earners can claim 40% or 45% relief.
Haine says: "This makes pension saving an ultra-tax-efficient way of saving money for retirement," particularly for those in higher tax bands." She also underscores the extended freeze on income tax bands until 2028, which will increase the number of people subject to higher tax rates.
The annual limit for pension contributions is £60,000, or 100% of your earnings — whichever is lower. However, high earners earning more than £260,000 may see their tax relief tapered down to as low as £10,000.
Haine’s tip: "Pensions have the added benefit of ‘carry forward’ rules where savers can max out unused allowances from the previous three tax years once they have made full use of their current year allowance.
"A large bonus, for example, can be put to work in a pension, with a saver potentially able to make a gross pension contribution of up to £200,000 before the end of this tax year on 5 April if they have not used any of their pension allowances from the previous three years."
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There are a few rules though: you must have contributed the maximum permissible amount to your pension in the current tax year and have belonged to a UK-registered pension scheme in each of the three tax years before the current tax year – though it does not matter if you did not pay money into the scheme over that period.
The investor also needs qualifying earnings in the current tax year that at least match the total amount they plan to contribute. Someone that wants to use the carry forward rule to contribute £110,000, for example, needs qualifying earnings that at least match that figure this tax year.
If you hold assets outside tax-efficient wrappers, consider moving them into an ISA or pension before the end of the tax year. With the reduction in the annual dividend allowance and capital gains tax exemptions, moving investments into a tax-protected account can save you from future tax liabilities.
Haine recommends utilising the 'Bed & ISA' or 'Bed & Pension' strategies, where assets are sold to realise current capital gains exemptions and then repurchased within an ISA or pension.
However, she warns: "There is a limited time window to make use of the current allowances, as providers set early Bed & ISA and Bed & Pension deadlines to ensure the transfer gets processed. At Bestinvest, for example, investments lined up for Bed & ISA must be sold by 1 April 2025. The investor then has until the end of this tax year to transfer the cash."
Married couples and civil partners can transfer assets between each other without triggering a tax event. This allows them to take full advantage of personal savings, dividend allowances, and capital gains exemptions.
Haine said: "As personal tax allowances come under increasing pressure, married couples and civil partners have a very handy tax advantage over their unmarried peers — the opportunity to make ‘interspousal transfers’ where savings and investments can be switched between spouses without triggering a tax event."
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Couples can also double up on their ISA allowances, meaning they could potentially shelter £40,000 this tax year if they both contribute to an ISA.
Haine advises: "Before transferring shares, funds or cash to your other half, remember they become the full, legal owner of the assets, so this is an unwise move if the relationship is on rocky ground."
For those at risk of moving into a higher tax band due to a pay rise or bonus, a salary sacrifice arrangement can help. By reducing your salary or bonus in exchange for increased pension contributions, you can lower both your income tax and national insurance contributions.
Haine explains: "Employees close to the £50,270 earnings threshold where the higher 40% tax rate kicks in could dip under it by using salary sacrifice pension contributions.
"Salary sacrifice can also be useful for those nearing the threshold for the 45% additional rate of tax at £125,140 as well as those earning above £100,000 who have a very unique tax challenge."
However, Haine cautions: "Salary sacrifice may give your pension a healthy boost, but agreeing to a lower salary could impact your ability to access credit, such as a mortgage, as you will have a lower headline income. Plus, employee benefits such as life cover, and holiday, sickness and maternity pay may also be affected so ask your employer for a personalised calculation of how the scheme will affect your take-home pay and benefits."
Parents can help their children take advantage of tax-free allowances, such as the Junior ISA (JISA), which has an annual allowance of £9,000. Haine suggests that parents can open a JISA and contribute to it for their child's long-term savings goals, such as university fees or a first home.
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She adds: "Regular bank or building society accounts may work well for a child saving up for a new bit of tech or a bike, but for bigger, longer term financial goals such as funding a gap year, university fees or even a first car or property deposit, a Junior ISA (JISA) is a better option. Children can have a Cash JISA and a Stocks & Shares JISA, but they cannot have more than one of each type."
Haine also highlights that, although children typically don’t pay tax unless they have significant income, gifts from parents can trigger tax liabilities if they exceed £100 in interest.
Those looking to reduce their inheritance tax (IHT) liability can take advantage of various exemptions, including the annual £3,000 gift allowance and the small gift allowance. By gifting assets to loved ones, individuals can ensure that these gifts don’t form part of their estate for IHT purposes.
Haine points out: "A cushion of up to £500,000 per person, or £1m for a couple, might sound generous but increasing numbers of estates are becoming subject to IHT as property and share prices continue to rise. In addition, IHT allowances will now remain at the same level until at least 2030 after the chancellor extended the freeze for a further two years."
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She recommends making use of available exemptions before the rules change and urges individuals to be mindful of the seven-year rule — if the giver dies within seven years of making the gift, the estate may still be subject to IHT.
These exemptions, which sit outside of the usual seven-year rule, allow for substantial gifts to be made tax-free. Among the key exemptions are:
The £3,000 rule: Up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one tax-year which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities. For a couple, those figures double, with up to £6,000 per couple per tax year and up to £12,000 if the allowance is carried forward for a year.
The small gift allowance rule: This means multiple cash sums of up to £250 per recipient can be given without affecting an individual’s IHT liability.
The gifts from surplus income rule: People can give away as much money as they want, as long it comes out of their regular income — such as employment or pension income rather than capital — and does not diminish the giver’s standard of living in any way. Effectively, it must be affordable after they have covered their normal outgoings.
The wedding gift rule: Parents can give £5,000 to a child, while grandparents can gift £2,500 to a grandchild to help cover wedding expenses.
With the tax year closing fast, now is the time to act to ensure your savings, investments, and assets are as tax-efficient as possible.
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