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The new tax year is now upon us. 2022-23 passed on 5 April 2023 and now, from 6 April, the 2023-24 year has arrived. This brings a fresh opportunity to make the most of your allowances by planning ahead – potentially helping you to save on tax later. Below, our team at Cedar House explains how 2023-24 is different from previous tax years and offers ideas about how to get the best from it. We hope this content is useful to you. To discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Why plan ahead for 2023-24?
There are 12 months in the 2023-24 tax year, so it can be tempting to put off decisions about your allowances until later. Yet this can bring the risk of losing money if, say, you are unable to use these fully in the final months of the year. For instance, you get £20,000 per tax year in ISA allowance. Any capital gains, dividends and interest earned within this “wrapper” are free from tax. Yet unused ISA allowance is lost at the turn of the next tax year. You cannot carry it over. However, you may not have a lump sum to invest towards your £20,000 ISA allowance if you leave the matter until the end of the tax year. Alternatively, by contributing to your ISA gradually (e.g. monthly) over 2023-24, you could do a better job of maximising your allowance.
How is 2023-24 different from other tax years?
In November 2022, the Chancellor announced a string of tax changes during the Autumn Statement. Many of these came into effect on 6 April 2023 (the start of the 2023-24 tax year). One notable change is the reduction in the tax-free capital gains tax allowance – i.e. the Annual Exempt Amount. In the previous tax year (2022-23), you could earn up to £12,300 in capital gains without facing a tax charge. In 2023-24, however, this has been reduced to £6,000 per year. Another important change is the lowering of the tax-free dividend allowance from £2,000 per year to £1,000.
Other key changes include the abolition of the lifetime allowance (the total value you can hold in pensions without a tax charge) and the reduction of the threshold for the additional rate income tax band from £150,000 to £125,140. Company directors will also want to note that corporation tax now stands at 25% on profits exceeding £250,000.
How do I get the most from the 2023-24 tax year?
Undeniably, 2023-24 presents a more strict tax environment than before. Some generous tax allowances have shrunk and higher earners face a higher tax bill on their income. Yet there are still opportunities to make your tax plan efficient and keep more of your hard-earned wealth. Firstly, speak to a financial adviser about how to use your ISA strategically. In 2023-24, your ISA is likely to be even more important in reducing tax on capital gains and dividends. Be careful with using your ISA for storing cash. Whilst cash ISA savings rates are at their highest in many years, they are still not beating inflation. You may find better interest rates from regular savings accounts and you do not pay tax on interest until it exceeds your Personal Savings Allowance (£1,000 per year for Basic Rate taxpayers or £500 for those on the Higher Rate). Instead, your £20,000 ISA allowance may be better used towards investments which could match or beat inflation in 2023 (which still stands high at 11.1%).
As mentioned earlier, consider spreading ISA contributions across the 2023-24 tax year rather than leaving things to the last minute (unless you are confident that you will have a lump sum ready to invest). A second idea to discuss with your adviser is overpaying your mortgage. In recent years, interest rates have been at historic lows (under 1%) and mortgage rates were also low. This typically meant that it was more financially astute to invest rather than overpaying your mortgage to save on the total interest you would pay. Now that interest rates are higher in 2023, however, there is more debate about the benefits of overpaying a mortgage versus investing. Now that tax-free returns are harder to generate outside of an ISA, moreover, some individuals may be even more inclined to overpay their mortgage. Some fixed-rate deals let you overpay by 10% of the total outstanding mortgage balance, annually. For instance, if you have £200,000 left to repay, then you could repay up to an extra £20,000 in a 12-month period.
A third idea to discuss with your financial adviser is your pension strategy. In 2023-24, the annual allowance for pensions has gone up by 50% – from £40,000 per year to a maximum of £60,000 (or, up to 100% of your earnings – whichever is lower). This represents an opportunity for some individuals to significantly boost their retirement fund. However, bear in mind that this chance – along with the abolition of the lifetime allowance – could become a political issue at the next general election. Labour, for example, has pledged to reverse the Chancellor’s abolition of the lifetime allowance. Consider discussing your pension options with a financial adviser.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk