7 actions to take before your tax-free allowances reset

With less than three weeks remaining the end of the tax year, savers and investors must capitalise on their tax-free allowances before time runs out.

Some tax allowances are not carry-forwardable to the next fiscal year, so it really can be a case of ‘use it or lose it’. Trying to maximise an ISA allowance at 11.55pm on 5 April, for example, could go wrong if a technical glitch prevents funds from clearing in time.

Alice Haine, personal finance analyst at investment platform Bestinvest, shares seven actions to take now before your allowances reset from 6 April.

1. Max out your 2023-24 tax-free ISA allowance of £20,000

Savers can shelter up to £20,000 this tax year in an individual savings account (ISA) either in cash or investments but the allowance resets on 6 April and cannot be backdated.

To take advantage of your existing £20,000 allowance, simply open a new ISA or top up an existing account and fund it with as much as you can afford to. Remember, cash ISAs can work well for short-term savings goals and investment ISAs are more suited for long-term savings targets with a time horizon of five years or more.

2. Top up your retirement savings to slash your income tax bill

Pension saving not only boosts your retirement income in the future but also slashes your income tax bill because any contributions attract tax relief at your marginal rate.

Basic rate taxpayers have 20% in tax relief added to their pot with each contribution while those on the higher 40% and 45% tax rates can respectively claim a further 20% and 25% off their tax bill for the year.

Read more: 9 savings mistakes to avoid at the end of a tax year

For every £1,000 gross contribution paid into a pension by a 20% taxpayer the net cost is just £800, with their pot receiving £200 in government tax relief. For a 40% taxpayer, the net cost after tax relief of a £1,000 pension contribution is just £600 while an additional rate taxpayer has a net cost of £550.

The maximum you can pay into a pension this tax year is £60,000 gross or 100% of your qualifying earnings (typically employment income as opposed to pension or property rental income) – whichever is lower – a limit that encompasses all contributions across all pension arrangements, tax relief and employer contributions.

3. ‘Bed & ISA’ or ‘bed & pension’ any assets held outside a tax wrapper to beat the tax raids

Not everyone has spare funds to move into an ISA or pension, but they may hold assets, such as shares or funds, outside a tax wrapper that would benefit from being protected from tax.

With the annual allowance for tax-free dividends slashed to just £500 from 6 April, down from the current £1,000 this tax year and £5,000 as recently as 2017-18, and the annual capital gains tax exemption halved to £3,000 from the current £6,000, moving investments into a tax-protected ISA or pension can be a good idea.

To do this, investors can sell shares or funds using their current exemptions and repurchase them with an ISA – a process known as ‘bed and ISA’ – to keep future returns out of the reach of tax charges. A similar process known as 'bed & pension' applies to investments moved into a pension, such as self-invested personal pension (SIPP).

4. Don’t miss out on lucrative ‘interspousal transfers’

Married couples and civil partners have a 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. This allows the couple to make use of two sets of allowances or so that more assets are held by whichever spouse is subject to lower rates of tax.

As people head towards a much heavier personal tax burden, couples can maximise allowances by making use of two sets of personal savings allowance, dividend allowance and capital gains exemptions to reduce the overall amount of tax exposure for the family.

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.

5. Drop a tax band with salary sacrifice

If you fear a pay rise or bonus will tip your income into a higher tax band, it could be worth asking your employer about ‘salary sacrifice’. Some employers will let their staff reduce their salary or bonus payments in lieu of increased pension contributions.

As well as a reduction in income tax, both employee and employer will pay lower national insurance contributions (NIC) as a result, which makes pension saving even more tax efficient. Those 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.

Read more: Bank of England poised to keep interest rates at 16-year high of 5.25%

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. For every £2 of taxable income above £100,000, they lose £1 of the personal allowance of £12,570.

Combine the loss of the personal allowance with the 40% income tax rate and those earning between £100,000 and £125,140 under the current rules are effectively paying 60% income tax on that proportion of their income.

6. Don’t forget your children – they have tax-free allowances too

Children have tax allowances that are useful for parents to help them build a pot of cash for their future. The first of these is their junior ISA allowance (JISA), which is capped at £9,000 this financial year.

A child cannot manage the money themselves until they turn 16 and cannot access it until they are 18. At that age, the JISA will be converted into an adult ISA, with the child able to roll over the entire JISA pot tax-free.

At this point they could deposit the first £4,000 into a lifetime ISA, which has very specific rules – the money must be used for a deposit on a first home (providing it costs less than £450,000) or for retirement after the age of 60. The benefit, however, is a 25% government cash bonus (up to a maximum of £1,000 per year) on their contributions.

Note that a child aged between 16 and 18 has a unique ISA loophole until the end of this tax year. Until midnight on 5 April, they can both contribute £9,000 to a junior ISA and £20,000 to an adult cash ISA at the same time – giving them an ISA allowance of up to £29,000 in total – currently the largest allowance of all age groups. This loophole will be closed on 6 April when the minimum age to open a cash ISA rises to 18 from the current 16.

7. Give a loved one a cash gift and reduce your inheritance tax bill at the same time

Those that can afford to give money away to family members can take advantage of inheritance tax exemptions to avoid triggering a large bill for their beneficiaries in the future.

The existing rules determine a nil rate band of £325,000 and an additional £175,000 residence nil rate band available where a main residence is left to direct descendants and the total value of an estate falls below £2m.

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