4 ways to maximise your allowances before the April deadline
How can you legitimately reduce taxes before the April 2025 deadline? In 2024-25, UK households are still facing pressures on their living costs, with the British Retail Consortium warning food prices could rise 4.2% by the year’s end.
Saving on needless taxes could help reduce the burden. Below, our Grantham financial planners offer four ideas to help UK taxpayers achieve this by maximising their allowances before the next tax year starts on 6 April 2025.
#1 Contribute to a pension
When you put money into a pension, the tax you would have gone to the UK government goes towards your retirement instead. This is called “tax relief” and is based on your highest income tax rate.
For instance, a basic rate taxpayer gets 20% tax relief. In effect, this means it “costs” 80p to contribute £1 to a pension. Someone on the higher rate can claim an extra 20% tax relief via their tax return (Self Assessment).
The latter is arguably at an advantage because they can “expand” the amount of income taxed at the basic rate (20%) through a gross pension contribution. This means fewer earnings are taxed at the 40% higher rate or the 45% additional rate.
It is best to check everything with a financial adviser before committing large sums to a pension. Bear in mind that the maximum annual allowance is £60,000, or 100% of your earnings (if this is lower). This assumes no “carry forward” is available.
#2 Use your Personal Allowance
In 2024-25, each UK taxpayer is entitled to earn up to £12,570 without paying income tax. After that, the 20% basic rate applies.
At £100,000, this Personal Allowance starts to taper off by £1 for every £2 over this threshold. This means that someone earning £125,140 in a single tax year will lose their Personal Allowance and effectively face a 60% tax rate.
This 60% “tax trap” can be entered unwittingly by certain taxpayers if they are not careful. To mitigate this, consider discussing your options with a financial adviser.
For instance, one option might be to top up your pension before tax year-end. Suppose your salary is £100,000 and you get a £10,000 pay rise. By putting this straight into your pension, it would prevent you from losing £5,000 of Personal Allowance.
Some individuals may not be in a position to use their Personal Allowance (e.g. carers and stay-at-home parents). Here, there may still be possibilities to reduce your overall income tax bill as a household.
In particular, the Marriage Allowance lets someone transfer £1,260 of their Personal Allowance to their spouse or civil partner. This can result in a tax saving of up to £252 in the tax year.
#3 Use your ISAs
You may know you can contribute up to £20,000 to your ISAs each tax year. Inside this wrapper, all interest, capital gains and dividends are free from their respective taxes. However, are you making full use of your ISA allowance?
Any unused ISA allowance is lost when the new tax year starts on 6 April. It cannot be carried over to the next year. By planning ahead, you can minimise the risk of this happening (e.g. by spreading out your ISA contributions month-by-month).
Consider how you will make the best use of your ISA contributions. Will you commit these mostly to a Cash ISA or a Stocks & Shares ISA, for instance?
If your total savings interest for the tax year will likely stay in your Personal Savings Allowance (PSA), then there may be little tax benefit to placing savings inside a Cash ISA. The interest rates from Cash ISAs also might not beat those offered by regular savings accounts.
In this case, other types of ISAs could be better options for generating tax-efficient returns. The right ISA(s) for you will depend on your unique financial goals and circumstances.
For instance, a young person looking to build up a first mortgage deposit may want to maximise their Lifetime ISA (LISA) before turning to other ISAs. The UK government will add a 25% “boost” to their contributions – up to £1,000 each tax year (provided certain conditions are met).
By contrast, a homeowner may benefit more from using a Stocks & Shares ISA since they can no longer benefit from the 25% LISA bonus.
#4 Mind your investment allowances
It is possible to generate tax-free dividends and capital gains outside of the ISA structure. This can be achieved using their respective allowances.
The tax-free allowance (annual exempt amount) for capital gains tax (CGT) is £3,000 in 2024-25. For dividends, the tax-free allowance is £500 for the same year.
Similar to the ISA allowance, any unused allowances from the above cannot be carried forward to the next year. However, to minimise CGT, it can sometimes be prudent to “spread out” your asset disposals across tax years if you can afford to wait.
You can also explore strategically combining these allowances with your ISA allowances for maximum tax savings. For instance, if you have an additional property like a buy-to-let, it may be worth reserving your CGT allowance if you plan to sell at some point in the tax year (since this cannot be placed inside an ISA).
If you want to ensure you’re taking the right steps to safeguard your financial future, please get in touch. We’d happily discuss your goals over a free, no-commitment consultation.
