Make full use of your annual tax allowances with these top tips

When it comes to building your wealth, your annual tax allowances are some of the most important components to help you manage your finances effectively.

With this in mind, we’ve put together this article to reveal some top tips to make full use of your annual tax allowances.

As with any financial approach, it can be very useful to consult an expert financial adviser – such as Netwealth wealth management services, for example – for a more tailored approach to your wealth.

Pension allowance

What is your pension allowance?

If you’re saving money in your pension pot for retirement, it’s important to understand the annual pension allowance.

This is the maximum amount you can contribute to your pension every tax year, while keeping your money sheltered from tax.

As of the current tax year 2023/2024, the annual pension allowance has risen to £60,000 from £40,000. This means any contributions that exceed this limit in one year, will result in tax charges.

How can you manage your pension allowance?

To help manage your annual pension, you can:

Analyse your pension with an adviser

Your financial adviser will be able to assess how effectively you’re saving money in your pension and analyse how close you are to your annual allowance each tax year, to ensure you’re making the most

of it.

Optimise your contributions

With your adviser’s help, you can re-evaluate the structure of your pension contributions, to make sure you’re saving the right amount and timing your contributions effectively each year. This will help you shelter as much of your money from tax as possible, and grow your wealth efficiently for retirement.

ISA allowance

What is your ISA allowance?

Another important allowance to be aware of is your individual savings account (ISA) allowance.

Your ISA is a specific savings account that allows you to shelter a certain amount of money from tax each financial year. As well as this, any growth from your ISA is also free from Capital Gains Tax (CGT).

As of the current tax year, your annual ISA allowance is £20,000.

How can you manage your ISA allowance?

To get the most out of your ISA allowance, you should consider:

Diversifying your ISA investments

There are four different types of ISA, and it could benefit you to invest in several for the most tax-efficient savings and growth. For example, you can open a cash ISA to save your money, while also contributing to a stocks and shares ISA that can potentially bring profitable returns.

Do note, you can only open one of each type of ISA annually.

Making the most of your spouse’s allowance

If you have a spouse or civil partner, you can each have an individual allowance for your ISAs, which combined, gives you a collective allowance of £40,000. Therefore, make sure by the end of each tax year, you’ve used up the full amount of both of your allowances.

Inheritance tax allowance

What is your inheritance tax gift allowance?

Your Inheritance Tax (IHT) gift allowance is also crucial for your finances when inheriting money, or leaving money for beneficiaries.

IHT is charged to the value of your estate above £325,000 – as of the current tax year – and any value underneath this is sheltered from tax when it’s inherited.

However, you can also use your gift allowance to pass on assets to your beneficiaries while you’re still alive. The annual gift allowance is £3,000.

How can you manage your inheritance tax gift allowance?

To better manage your IHT gift allowance, you can:

Explore options with your adviser

Your adviser can make you aware of all the tax rules that apply to your gift allowance, so you can better navigate all the complexities involved in the process. For instance, this can include being able

to spread your total allowance across several people, or knowing that any gifts with a value up to £250 can be given several times in one tax year.

Giving gifts for a wedding

You can benefit from tax-efficient gifting if someone is getting married, and you give them a tax-free gift for this occasion.

You can gift £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person, all with shelter from tax.

As well as this, if you’re gifting to the same person, you can combine your wedding gift allowance with any other allowance – all except the small gift allowance.

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Now you know some great tips for managing your tax allowances better, make sure you discuss these options with your financial adviser, to see how these steps can be implemented in your own approach.

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Please note, the value of your investments can go down as well as up.