Savings and investments Tax Personal tax Retirement Inheritance tax

End of tax year checklist: How to maximise your tax allowances before they expire

With just nine weeks until the end of the financial year, follow Bestinvest’s guide on utilising your allowances to manage your income tax liability

01 Feb 2023
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Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:  

“If you are among the 12 million Britons breathing a sigh of relief after successfully filing a self-assessment tax return by midnight last night (January 31), then relax and enjoy the moment – but not for too long.   

“With just nine weeks until the next big deadline in the tax calendar – the end of the financial year at midnight on April 5 – now is the time to take advantage of the tax allowances available to reduce your income tax liability, particularly for those hit with a sizeable tax bill for the 2021/22 tax year.

“Maximising tax allowances has never been more important following Chancellor Jeremy Hunt’s decision to freeze most personal tax allowances until 2028 in his Autumn Statement in November. He also cut the threshold at which the highest 45% income tax band kicks to £125,140 from £150,000, drastically reduced the annual Capital Gains Tax (CGT)exemption and unveiled steep reductions in the annual tax-free dividend allowance.

“With a record 5.5 million expected to pay income tax at the 40% band this year, as bumper pay rises push people’s salaries into higher tax thresholds, focusing on longer-term savings as well as the everyday bills will become imperative for those looking to reduce the income tax hit.

“For this reason, taking advantage of tax-free allowances on Individual Savings Accounts (ISAs) and pension contributions, as well as crystallising any capital gains to maximise this year’s more generous exemptions while they last, should be front and centre of taxpayer’s minds.

“When you consider the flip-flopping on tax policy that the country endured in the final four months of last year, it proves there are few guarantees when it comes to your income tax liability. Britons now face the highest tax burden since the Second World War, and while the cost-of-living crisis dominated household budgets over the course of 2022, as the financial squeeze eases attention must turn to longer-term savings and cutting that dreaded tax bill.

“Remember, not all tax allowances can be transferred on to the next financial year, so most areas it really is a case of ‘use it or lose it’.”

Follow Bestinvest’s end of tax year checklist to help you make the most of all your 2022/23 tax allowances and set yourself up for the next financial year:

Open or top up an ISA to utilise your £20,000 tax-free allowance 

Savers can shelter up to £20,000 this tax year in an Individual Savings Account either in cash or investments. ISAs are attractive for taxpayers because all income and capital gains are tax-free, allowing you to grow your wealth and withdraw investments when you want without fear of a hefty tax bill at the end.

This really is a ‘use it or lose it’ tax allowance because once the April 5 deadline has passed, you cannot take it with you into the new year. For couples there is a double gain as they can squirrel away £40,000 in total (£20,000 each), making it an allowance not to be missed particularly when you hear whispers of the Government exploring capping the total amount held in ISAs at £100,000. 

If you want to utilise your £20k allowance, simply open an ISA or top up an existing one and fund it with as much as you can afford to. If you are opting for an investment ISA, don’t panic if you need more time to make an investment selection, you can simply store your money initially as cash and then drip feed it slowly into the markets at regular intervals. Some platforms, such as Bestinvest, provide interest payments on cash balances, so the money won’t be sitting idle while you take more time to select your investments carefully.

Investing on a monthly or quarterly basis takes advantage of pound-cost averaging, so rather than investing a lump sum at a single price point – such as during a supposed dip - investors can buy smaller amounts at regular intervals no matter what the price is at the time. This cushions some of the effects of volatility in the short- and medium-term and those that stay invested over the long term can moderate risk even more as their investment costs should be lower and returns higher.

Take note: Don’t leave it to the last minute to open or top up an ISA. Your online provider may need time to process your application or add the funds. While the ease of online investing has helped many investors looking to maximise allowances at the eleventh hour, technology can still thwart the process if an internet connection goes down or the funds don’t clear in time. To successfully invest in an ISA by the deadline, use a UK personal bank account in the name of the applicant, make the payment using a debit card (a credit card often won’t be accepted) and have your National Insurance number handy.

Don’t have upfront cash to invest? Then consider transferring other investments to protect them from tax

Not everyone has pots of cash sitting around they can move into investments, but they may have shares or funds held outside a tax wrapper such as in a General Investment Account that would benefit from tax-free perks.

With the annual allowance for tax-free dividends slashed to £1,000 from £2,000 from April, and then cut again to a mere £500 next year, it could make sense to move investments inside an ISA or pension.

Another consideration is the big reductions in annual capital gains exemptions (from, £12,300 this tax year to £6,000 from April 6 and then cut again to £3,000 in April 2024), with investments more likely to incur a tax charge if the gains for the financial year exceed the allowance.

To beat tax allowance cuts, investors can sell shares or funds 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 applies to investments moved into a pension (such as Self-Invested Personal Pension), where a ‘Bed & Pension’ transfer can be utilised. While you may pay CGT on any profits above your annual allowance, moving the money into an ISA or SIPP means you won’t have to in the future – something that will become very beneficial as allowances dwindle.

Take note: With a limited time window to make use of the more generous CGT allowance, allow several days to complete the Bed & ISA or Bed & Pension process before the deadline.

Top up your retirement savings to benefit from generous tax relief

For pension savers looking to boost their future pension income, now would certainly be a good time to give their retirement savings a boost. That’s because any money invested in a pension not only benefits from the beauty of compounding over the long term – an effective way to counteract the damaging effects of high inflation - but also protects against income tax as the contributions attract tax relief.

While basic rate taxpayers get 20% in tax relief added to their pot with each contribution, those on the higher 40% tax rate get a further 20% and additional rate taxpayers receive a further 25%. For every £1,000 gross contribution paid into a pension by a 40% taxpayer, the net cost is just £600 giving their pot a generous £400 bump-up in tax relief.

This makes pension saving undoubtedly the most tax-efficient way of saving money for retirement, something that has become even more pertinent amid the extended freeze on the basic and higher rates of income tax until 2028, which will drag millions more into a higher tax band.

With the risk that the Chancellor or a future Labour government could target these generous pension tax reliefs in the future, it could be wise for those subject to the highest tax bands to maximise their pension contributions this tax year.

Just remember that unless you are fortunate enough to have adjusted income of over £240,000 a year (and will therefore be subject to a tapered allowance), the annual allowance limit you can pay into your workplace or private pension per tax year is £40,000 gross or 100% of your salary – a limit that encompasses all contributions across all pension arrangements, tax relief and employer contributions.  

Take note: Once the money is added to your pension, you cannot touch it until you are 55, or 57 from 2028.  Plus, go over the pension contribution limit and you risk incurring a tax charge. Thankfully, you can carry forward any unused annual allowance from the previous three tax years. So, look at using up your allowances in the run up to the end of the tax year in April, particularly if you are a higher earner.

Top up pensions for family members as non-taxpayers get tax relief too

Even savers that don’t pay tax, such as a partner that is not working or a child, can receive pension tax relief, though the ceiling on the annual gross pension allowance is lower at £3,600. This means you could invest up to £2,880 into a pension for a non-working partner or child, with the sum then topped by up with £720 from the government.

While a child might not thank you for this gift now, they will in later life when they realise the true value of starting their pension at a young age.  A sum of £2,880 invested every year in a Junior SIPP would mean total contributions of £64,800 over 18 years after the current government tax relief of £12,960 of 20% has been applied.

Were those contributions to grow by a modest annual compound growth rate of 5%, then at 18 the pension would be worth an impressive £107,619. Even if no further contributions were ever made after this age, the pension would be worth an estimated £919,780 by the age of 60 with an annual compound return of 5%.

Giving a child such a huge head start on their pension means they can focus on other financial needs such as raising a house deposit or paying for a wedding.  

Take note: Like an adult pension, a child cannot access this money until their late 50s so only consider this option if it is money no one needs for a very long time. 

Reduce a future inheritance tax bill and give a loved one a helping hand

If you can afford to give money away to loved ones, you could use your allowances to avoid triggering an inheritance tax (IHT) bill or other tax charges. The annual inheritance tax nil rate band has been frozen at £325,000 per person since 2009 and this will remain the case until 2028. This means the real value of the allowance is shrinking once inflation is considered, so it’s no surprise that more people are finding that their parents’ or grandparents' estates are subject to inheritance tax when they die.

One way to mitigate this is to gift money to your loved ones while you are still alive. While giving and receiving cash does not directly incur a tax bill, if you die within seven years of making the transfer then IHT rules will come into play. This applies if the value of your estate exceeds £325,000 at death, with amounts over this limit potentially attracting a tax-charge payable by your beneficiaries. 

The good news is that several exemptions apply outside the seven-year rule that allow people to make financial gifts without worrying about a hefty IHT bill. These include: 

  • Up to £3,000 can be given away every year tax-free. This allowance can be carried forward for one tax-year which means up to £6,000 can potentially be gifted in a lump sum free from future IHT liabilities.  
  • The small gift allowance means multiple cash sums of up to £250 per recipient can be given without affecting an IHT liability.  
  • In addition, people can also give money away that comes out of their regular income – a regular payment that does not affect the giver’s standard of living.

Take note: Parents or grandparents looking to give loved ones a helping hand can top up ISAs, JISAs, SIPPS and Junior SIPPs ensuring their family members grow their wealth in a tax efficient way.

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.

Both employee and employer will pay lower National Insurance contributions (NIC) as a result, which makes pension saving even more tax efficient. For those close to the £50,271 earnings threshold where the higher 40% tax rate kicks in, you could dip under it by using salary sacrifice pension contributions.

Take note: While salary sacrifice will give your pension a healthy boost, agreeing to a lower salary can have an impact on your ability to access credit, such as a mortgage, as you will have a lower income to play with. Plus, employee benefits such as life cover, and holiday, sickness and maternity pay may also be affected so ask your employer for a personalised calculation of how the scheme will affect your take-home pay and benefits.

Don’t ignore the value of ‘interspousal transfers’

As personal tax allowances come under pressure, married couples and civil partners have a very lucrative tax advantage over their unmarried peers - the ability to make ‘interspousal transfers’ where savings and investments can be switched to a spouse subject to lower rates to tax 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 CGT allowance to reduce the overall amount of tax exposure for the family. 

Take note: Before transferring shares, funds or cash to your other half, just remember that they will become the full, legal owner of the assets, so tread carefully if you have any doubts about the strength of your relationship.

Some children are liable for tax, so max out your child’s £9,000 ISA allowance

It’s not just your savings that can benefit from the tax-free perks of an ISA, a child can also take advantage though this allowance is capped at £9,000 this financial year. 

While children’s savings rates have rapidly improved in recent months, too much money added to a child’s savings account could trigger an unnecessary tax bill. This would apply if a child earned a sizeable income as children pay tax on their earnings too. Like adults, children have a tax-free Personal Allowance enabling them to earn £12,570 income a year and a Personal Savings Allowance, with basic rate taxpayers able to earn up to £1,000 of savings interest tax free. 

Another consideration is if a child receives more than £100 in interest from money given to them by the parent, then the parent is liable for tax on the interest if it is above their own personal savings allowance. The £100 limit does not apply to gifts given by grandparents or other relatives.  

A regular bank or building society account is ideal for a child saving up for a new gadget or bike, but for bigger financial goals such as funding a gap year, university fees or even a first car, that require larger sums, a Junior ISA is a better option.

While ISA deposits can be held in cash or invested, a stocks & shares ISA could be considered if there are no plans to touch the money any time soon and the child wants to build up a sizeable sum for a specific goal. 

A child receivingjust £50 a month in an investmentJISA that earned5% per year over 18 years wouldhave a pot at the end worth £17,333,froma totalcontributionof £10,800 – an investment gain of £6,533 without factoring in any charges. 

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

Investments go down as well as up and investors may not get back the amount originally invested. Prevailing tax rates and reliefs depend on individual circumstances and are subject to change.

This article is solely for information purposes and is not intended to be and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.