How to catch a break in a taxing year

With a general election on the horizon and a series of tax changes due, it’s important to know how to make the most of your money.

This could be a seismic year for tax. A raft of changes are due to take effect in the coming months and the prospect of a general election means further upheaval is likely.

Still, while financial advisers urge clients to consider tax planning, they also warn people to remain focused on their long-term goals recommending they should try to look through the noise by planning on the basis of what we know today because it’s all too easy to get distracted by speculation, particularly in an election year. Ultimately however a financial adviser can help people to concentrate on their long-term priorities.

The bad news is that most of the tax changes currently slated for 2024 will cost people money. True, the employees’ national insurance rate fell from 12 to 10 per cent in January, saving an average worker £450 a year. But on the downside, the chancellor has already frozen the thresholds at which people start paying basic, higher and additional rate income tax until 2028.

That will drag around 4 million people into the tax system who didn’t previously pay income tax; and an additional 3.5 million people will start paying higher or additional rate tax at 40 per cent or 45 per cent respectively.

Also, from April 6, the first day of the 2024-25 tax year, tax bills could rise for people with savings and investments. The dividend allowance – the amount of dividends you may earn without paying any tax – will fall from £1,000 to just £500. And the capital gains tax allowance – the tax-free investment profit you may make – comes down from £6,000 to £3,000. Both allowances were also reduced last April.

The big question now is what else might change – either in the government’s spring budget, its last big pre-election financial set piece – or following an election if Labour were to win power.

One area attracting a great deal of attention is inheritance tax, with rumours that the government could abolish the levy. Labour, however, has indicated it would repeal such a decision if it wins power.

Certainly, inheritance tax has become an issue for more people. The size of estate that may be passed on to heirs with no tax liability has been frozen at £325,000 since 2009, though that increases to £500,000 with an additional allowance for your home. HM Revenue & Customs received £400 million more in inheritance tax between April and November last year than during the same period in 2022. Still, the £7 billion of revenue lost from abolishing inheritance tax would not be easily replaced.

How, then, to pick a path through these changes and uncertainties? There are plenty of options for organising one’s affairs to minimise your tax liabilities,for example people can make good use of their £20,000 annual individual savings account (ISA) allowance. All income and capital gains on investments inside an ISA are tax-free.

Venture capital trusts and the enterprise investment scheme – specialist products offering tax relief on investments in small, early-stage companies – could also work well for some savers.

Private pensions provide another opportunity. The government has recently increased the annual allowance – the maximum pension contributions you can make while receiving tax breaks – from £40,000 to £60,000. It has also abolished the lifetime allowance, which previously capped the total amount of pension saving. Labour have said that it will reinstate this allowance, so there could bring a narrow window of opportunity.

As for inheritance tax, there are lots of ways to plan ahead. For example taking out life insurance with a guaranteed payout into a trust can ensure that beneficiaries can pay the tax bill. It might also be possible to reduce the size of the estate by making gifts on a regular basis or by making larger gifts that will require seven years to leave the estate for inheritance tax purposes.

Other possibilities include investing savings in business or agricultural assets that fall outside the inheritance tax net; private pensions can also be a good way to plan for the tax, since they’re not usually caught by it. A good adviser can help you combine strategies to get the best result.

How we can help

At every stage of your life, and whether you’re single or with a partner, financial planning is important because it helps you understand your current financial situation, establish future goals, and determine the best ways to achieve them. Whether this includes planning your retirement, buying your own home, managing your finances in the most tax-efficient manner possible, or considering estate planning, here at Logic Wealth Planning we can certainly help. And not only can we help you to save and invest for the future, but we can also help in the here and now, with advice on how to arrange your finances today.

To start the conversation call us now to arrange an initial no obligation meeting – tel 0808 1234 321

Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.