Tax allowances, we may never have it so good again….

On the back of record government spending during the pandemic and beyond (the energy price guarantee for example) we are left with a big hole in government finances. We have seen numerous fiscal policies used to raise tax revenues, but two approaches stand out for savers:

1. Frozen tax bands / allowances

The Income Tax personal allowance, higher rate income tax threshold, National Insurance thresholds and IHT Nil Rate Bands, to name a few, frozen at current levels until 2028.

This creates the concept of ‘fiscal drag’ where people do not see a tax increase but the impact of rising inflation and average earnings trying to keep up, results in higher tax revenues as more people pay tax at a higher rate than they would do if allowances kept up.

2. Reduction in allowances

A more transparent way to increase tax revenues is to either reduce tax free allowances or increase tax rates. We have seen several changes like this announced:

• Dividend Allowance – once £5,000 when introduced in 2016 and currently £1,000 following reductions in 2018 and 2023. This will be halved to £500 from 2024/25. These changes in 2023 and 2024 alone are expected to raise a further £3bn by 2028.
• Dividend rates - a 1.25% increase in rates to 8.75%/33.75%/39.35% respectively from April 2022 is also expected to bring in £3bn over 5 years.
• Capital Gains Tax (CGT) Annual Exempt Amount (AEA) – was £12,300 in 2022/23, reduced to £6,000 in 2023/24 and then £3,000 from April 2024. This is anticipated to raise £1.6bn by 2028.

With increased regulatory scrutiny, Consumer Duty makes it clear that we must be active in providing and demonstrating value whilst avoiding foreseeable harm.

Why you must act NOW!

It is clear these tax policy changes require you, when advising clients with general investments, to act now to manage client gains and losses avoiding paying more tax than is absolutely necessary. This applies to the current tax year and beyond.

Tax year end 101

Regular planning to undertake every tax year

1. Bed & ISA
2. Maximise pension contributions
3. Manage gains and losses utilising the CGT AEA

Saving Tax for your client has never been so easy

With the pressure on to minimise the ‘investment drag’ personal taxation can have; it is crucial that money is held within the right ‘product wrapper’. Therefore, maximising tax allowances is even more important than ever before. Maximising investments into ISAs & pensions means you will take full advantage of investment returns by reducing any ongoing tax liability. This should be done at the beginning of the tax year to maximise the period investments are held efficiently.

Managing capital gains and losses is often a neglected area. With a CGT AEA it is not uncommon to see general investments left to accrue gains and losses over several years. The CGT AEA is a ‘use it or lose it’ allowance which can result in customers being liable to CGT when they encash the investments all in one tax year. This particular tax year you have the opportunity to consider two things:

1. Realising gains which have built up using the current £6,000 AEA
2. Realise losses and register them with HMRC via self-assessment (or in writing if not registered for self-assessment. A net loss this year could be really powerful in future years where the AEA will be much lower. For example, a gain of just £5,000 in 2024/25 could benefit from a loss carried forward of £2,000 bringing the gain within the AEA of £3,000.

CGT Management is a lot of work

The reduction in the AEA has focused the mind regarding CGT management. You will be required to spend more time on this in the near future and sadly ‘time is money’. For your clients it is more important than ever that you choose the right platform partner. One which helps you to efficiently manage capital gains and losses for your clients providing CGT reporting tools and facilitates the prompt movement of wealth between ‘product wrappers’.