A Timely Reminder of Three Key Personal Financial Planning Strategies You Can Put Into Action Before This Tax Year End
With under a month to go until the end of the 2024/25 tax year, we thought that it would be useful to provide you with a brief reminder of three key personal financial planning strategies, so that you can check whether you have already made good use of these or whether any further action might be needed.
1 - MAKE GOOD USE OF YOUR PENSION ALLOWANCE
Most workers are allowed to pay in up to £60,000 (the “Annual Allowance") into their pension for the 2024/25 tax year.
This figure is the total of personal and employer pension contributions. Personal contributions are capped at 100% of earned income.
This allowance is reduced for very high earners who are subject to the Tapered Annual Allowance. If you think this might affect you, you can read more about it here:
If you are subject to the Money Purchase Annual Allowance, due to having previously “flexibly accessed” your pensions, you will have a lower allowance. You can find more information about this here:
As well as your allowance for the 2024/25 tax year, you are able to “carry forward” any unused allowances from the three previous tax years (2023/24, 2022/23 and 2021/22), starting with the earliest year first.
This means that any remaining allowance from 2021/22 is “lost” if you don’t use it before the end of the 2024/25 tax year. However, to use any spare allowance from 2021/22 you need to have first maximized your current year’s allowance.
Maximizing pension allowances can be a particularly valuable strategy when you are on the approach to retirement.
Pensions and ISAs are both good (more about ISAs later) but the balance probably favours pensions as your career progresses because you generally earn more and you are that bit closer to being able to draw on your pension.
The main downside to pensions is that you usually can’t access your money until at least age 55 (rising to 57 from April 2028).
This means that if you are in your 20s or 30s, your money may be inaccessible for multiple decades. It won’t help you with a deposit on a house or paying for emergencies, for example.
But if you are in the approach to retirement, this downside is much less relevant, allowing you to focus on the upsides of pensions.
When you pay money in, you receive income tax relief at your highest marginal rate.
This means that, once you have reclaimed the relevant tax relief, for a 20% taxpayer it costs £800 to get £1,000 in a pension, whereas for a higher rate taxpayer it only costs £600 and for an additional rate taxpayer it is just£550.
All income and growth within your pension build up tax-free. The compounding of these tax-efficient returns can be a significant benefit.
In addition, when you come to take money out of your pension, you can have up to 25% of it tax-free (subject to a £268,275 cap). The rest will be subject to Income Tax.
Once you reach retirement age, you have flexibility over the amount and timing of when you take money out, allowing you to tailor the withdrawals you make to suit your expenditure needs and your personal tax position.
If you think you will be a basic rate taxpayer in retirement but are a higher or additional rate taxpayer now, you can get excellent value from pension contributions.
2 - USE YOUR INDIVIDUAL SAVINGS ACCOUNT (ISA) ALLOWANCE
The ISA allowances are currently £20,000 for adult ISAs, £9,000 for Junior ISAs and £4,000 for Lifetime ISAs. These allowances are due to be frozen until April 2030.
The key benefits of using your ISA allowance are:
You don't pay tax on dividends from shares. All dividend income inside your stocks and shares ISA remains tax free
You don't pay capital gains tax on any gains
You don't pay tax on income (e.g. interest) earned within the ISA
To illustrate the value of an ISA, let’s look at the position for a couple who are both 45% taxpayers, who both plan to use Cash ISAs.
There is no real reason why the interest rate on a Cash ISA should be any different to the interest rate available on a taxable savings account.
Let’s assume that a 4% interest rate can be achieved on both.
If £40,000 were saved into Cash ISAs, that might generate £1,600 p.a. of tax-free interest.
If this money were instead kept in normal savings, as 45% taxpayers, they would have to pay tax on the interest via their tax returns. Their Personal Savings Allowance would be £0 (as they are 45% taxpayers).
Therefore, on £40,000, that’s £1,600 interest, but after tax it is just £880.
Just using a Cash ISA rather than taxable cash savings is, in this simple example, generating them an extra net return of £720 per annum without them having to take any more risk.
3 - USE YOUR CAPITAL GAINS TAX (CGT) ALLOWANCE
If you are already making full use of your pension and ISA allowances, you may have also built up a taxable investment portfolio, either through individual shares or funds. Providers will often call this type of account a “Dealing Account” or a “General Investment Account”.
Within a “Dealing Account” or a “General Investment Account”, any capital gains that you generate will be subject to CGT when you crystallize those gains.
Even if you don’t need to take a withdrawal from your portfolio now, using your CGT allowance each year reduces the chance of you needing to pay tax later if the CGT rules change or if you need to take a large withdrawal from your portfolio at a time when you have accumulated large gains.
The capital gains tax allowance for the tax year ending 5th April 2025 is £3,000. If you sell any assets this tax year, this is the amount of profit you can make before any tax is payable.
Taking a simple example, if you bought a fund for £20,000 and sold it for £22,000, no CGT would be payable as the whole gain would fall within your CGT allowance.
If, however, you sold that fund for £33,000, you would have a £13,000 profit, of which £10,000 would be taxable at a rate of either 18% or 24% depending on your marginal tax rate.
The CGT allowance applies to the combination of asset sales during a tax year – you don’t get a separate allowance for each asset.
You can’t carry forward any unused CGT allowance. Therefore, if you have accumulated gains within your Dealing Account / General Investment Account, depending on your tax rate, you have the potential to save yourself between £540 and £720 of possible future taxation by making good use of your allowance, based on current CGT rates by taking action now.
A FINAL WORD
Making good use of the available allowances is one of the key benefits of a sensible household financial planning strategy. It can be an excellent way of making your money work harder for you without the need to take extra risk.
Please note that whilst 5th April is the last day of the tax year, this year it falls on a Saturday, so the last working day for most financial institutions will be the 4th at the latest. Many will have put earlier deadlines in place. It’s best not to leave it until the last minute!
If you would like impartial help thinking through what you can do to plan your own financial future, please call us on 020 3488 9505.
The value of your investments can go down as well as up, so you could get back less
than you invested.
Tax and Estate planning is not regulated by the Financial Conduct Authority.