Top Tips for Tax Efficiency Before the End of the Year

With the tax year-end fast approaching, are you thinking about how to best maximise your tax efficiency? By Madeleine Ingram

From ISAs to pensions, VCTs to EISs, there are plenty of ways to make your money work harder.

ISAs

The annual ISA allowance is £20,000. But with multiple types of ISAs available, including traditional cash, stocks and shares ISAs, Help to Buy ISAs, the Lifetime ISA, Innovative Finance ISAs and Junior ISAs, it can be difficult to know which one is right for you. Make sure you understand your options before investing, if in doubt speak to a financial adviser.

Pension

The Chancellor’s March budget saw a lot of changes to pensions – with the top takeaway the abolishment of the lifetime allowance (LTA) from April 2024.

Although the LTA is going, the government is keeping a cap on the amount of tax-free cash you can take – setting this at 25 % of the current LTA, £1,073,100. That means you can withdraw up to £268,275 without paying any tax on it.

The total amount you can save into a pension each year, without paying an additional tax charge, will go up to £60,000, from £40,000. For high earners there are still tapering restrictions, however the new lower limit will be £10,000 a year, up from £4,000. 

Contributions beyond the annual maximum are taxed at a high rate, which is why more people are considering VCTs and EIS as an additional retirement savings tool.

VCT and EIS

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are tax-efficient investment schemes that can help you mitigate your tax liabilities. You can invest up to £200,000 per tax year in VCTs and immediately receive 30% income tax relief — you must hold the investment for at least five years. Most VCTs also pay out annual tax-free dividends and any profits on disposal are free of capital gains tax (CGT).

EISs are similar in that they offer 30% income tax relief.  You can invest up to £1 million per tax year (or £2 million if the investee companies fit ‘knowledge intensive’ criteria). EIS investors can also defer CGT liability, EIS gains are CGT-free and there is loss relief available. Additionally, EIS investments are free of inheritance tax, provided they’ve been held for at least two years and are held at the point of death. Some knowledge intensive specific EIS Funds allow for income tax relief carry back to 21/22, as long as investors are in before 5^th April 2023.

Capital Gains Tax

Finally, don’t forget about your CGT allowance. Each person has an annual CGT allowance of £11,700, which means gains on assets sold outside a tax wrapper could leave you liable for up to 20% CGT (or 28% on residential property investments). If you’re thinking of selling some CGT-liable assets in the near future, consider disposing of some now and some after April to take full advantage of both yearly allowances.

To maximise the tax efficiency of your investments, it’s always recommended to consult a professional financial adviser. With a little planning and preparation, you can ensure your money works as hard as possible for you, now and in the future.

Madeleine Ingram is a Director at Calculus Capital