Seven tax allowances to take advantage of while you still can

Tax rises and loophole closures are firmly on the Government agenda.

But those hoping for clues as to how the Government might raise much needed tax revenues will have been sorely disappointed by Boris Johnson’s address at the 2021 Conservative Party Conference.

Instead, Boris concentrated on bigger-picture ideas and a future commitment to ‘level up’ across the UK. 

However, and rather tellingly, the Prime Minister has more recently refused to rule out further tax hikes in the future.

With this in mind, Angela Lloyd-Read, financial planner at 7IM, looks at seven tax allowances available now that savers should be taking advantage of while they still can.

1. Individual savings accounts

Make sure to use your annual individual savings account allowance of £20,000 each tax year, or it will be lost forever.

Isas allow you to earn interest and dividends free of tax, and withdrawals don’t suffer any capital gains or income tax. ISAs can help to provide greater flexibility and higher net income in retirement, when used strategically with pension income.

2. Pension contributions

Tax relief on pension contributions can provide a real boost to future income. While taxpayers benefit the most, with higher allowances for paying into pensions and higher tax reliefs, non-taxpayers can also benefit greatly from contributing to a pension, receiving a 20 per cent boost on up to £3,600 a year.

If you have been unable to make full use of your contribution allowances over the previous three tax years, you should be able to benefit from making a larger contribution in the current tax year, if you are eligible to do so. 

Making a larger contribution in anticipation of an imminent retirement could also boost the tax-free cash available.

3. Salary sacrifice and bonus sacrifice

If your employer allows you to make pension contributions via salary sacrifice, you can benefit from immediate tax relief and a national insurance saving on these contributions. 

Your employer might also pass on some of the employer national insurance savings too.

Making a bonus sacrifice into your pension also benefits from tax and national insurance savings, but you might need to decide to make the bonus sacrifice before you know the size of the bonus!

4. Capital gains tax and gifts to your spouse or civil partner

This tax year’s capital gains tax (CGT) allowance is £12,300 per individual. Should you have unwrapped assets, outside of a pension or Isa, then it can be useful to make use of the annual CGT allowance to avoid storing up higher future tax liabilities.

Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT allowance for the year. 

If the recipient pays tax at a rate lower than the individual making the transfer, any gains over the allowance could also attract less tax.

5. Gifting out of excess income

Gifts made in a person’s lifetime might be added back into an estate and possibly subject to inheritance tax (IHT) if they are given away less than seven years before death.

Gifts of up to £250 per person would likely be exempt, as would gifts for weddings or civil partnerships within set limits, i.e. £5,000 to a child or £2,500 to a grandchild.

But using the ‘gifting out of excess income’ rule also allows larger gifts to be given without them likely becoming subject to IHT.

Grandparents might, for example, wish to use excess pension income to pay for school fees, or pay for an indulgent annual family holiday. An aunt or uncle might want to provide for university fees or maintenance.

Planning is key when setting up this kind of arrangement, but it can be a very useful way to pass wealth to other family members that might otherwise risk being subject to IHT.

6. Venture capital trusts

If you have maximised your pension contributions, fully subscribed to your Isa, and it is suitable for you to invest some of your wealth in a higher-risk strategy, investing in Venture Capital Trusts (VCTs) can provide immediate and longer-term tax benefits.

VCTs invest in innovative smaller companies, usually at an earlier stage of company development, and provide tax-relief of 30 per cent of the investment on the first £200,000 per annum. 

The investment needs to be held for at least five years to retain the tax relief, but dividends and capital gains on this investment are also tax free.

It’s important to note that VCTs do carry a higher degree of risk, therefore I urge you to consult a Financial Adviser/Planner to see if they are the most suitable option for you.

7. Onshore Investment Bonds

UK investment bonds are taxed differently to other UK based investments, allowing investors to take advantage of some useful tax planning opportunities.

There is no future liability to basic rate income tax or CGT on any bond gains, offering higher rate taxpayers the opportunity to invest while paying higher rates of tax, and make withdrawals when they might be subject to lower rates of tax, perhaps in retirement.

Should withdrawals need to be made before a reduction in tax is applicable, 5 per cent of the amount invested can be withdrawn without any immediate liability to additional tax, and unused allowances can be rolled forward.

The key to maximising tax efficiencies is in the detail and the planning.