Maximize Your Tax Savings with ISAs: A Guide to Year-End Tax Planning

With Jeremy Hunt MP, Chancellor of the Exchequer, set to deliver his first Spring Budget on March 15th, taxpayers are still wrapping their heads around the Autumn Statement from last year, which takes on added significance as the tax year draws to a close on April 5th.

In the Autumn Statement, the Chancellor announced a cut in the capital gains tax annual tax-free allowance from £12,300 to £6,000 starting in April 2023. It will be halved again to £3,000 in April 2024. He also announced that the current annual dividend tax allowance would be cut from £2,000 to £1,000 for the 2023/24 tax year, then halved to £500 from April 2024 onwards.

As the end of the tax year approaches, it’s a good time for earners, savers, and investors to review their tax position. Many allowances are calculated on a yearly basis, so it’s important to identify any potential tax savings, especially with changes coming into effect.

One way to save on taxes is through the Individual Savings Account (ISA) tax wrapper, which spans a range of savings and investment products, including cash, stocks & shares, and lifetime ISAs. The annual ISA allowance is currently worth £20,000, and it’s a great way to supplement income during retirement.

Holding funds in an ISA can make sense because the tax you would pay on capital gains on investments such as shares sits between 10% and 20% depending on your tax position. Even if keeping your money outside the clutches of the tax authorities doesn’t seem relevant now, it might in the future. It could be worth planning ahead for when your wealth grows.

There are many advantages to holding savings or investments within an ISA. For example, no income tax is due on interest or dividends paid out from cash/investments, and no capital gains tax is payable on withdrawals or when changes are made to underlying investments.

Following the government’s announcement that the tax-free dividend allowance will be reduced to £1,000 from 6 April 2023, and then to £500 from 6 April 2024, subscribing to an ISA will help to offset the impact of this reduction over time.

If you’re looking to take advantage of any unused ISA allowance, ‘bed and ISA’ can be a useful way to transfer assets into an ISA so that future investment growth and income is sheltered from tax. It’s also important to remember that tax planning should incorporate using available capital gains tax annual exemptions, particularly where individuals hold significant non-ISA portfolios that have large unrealised capital gains.

In the Autumn Statement, the Chancellor also revealed that income tax thresholds will remain frozen until 2028, meaning that more people will start paying tax as earnings rise. It’s worth keeping an eye on these thresholds, especially if you’re approaching the higher-rate income tax threshold.

In conclusion, it’s a decisive time for earners, savers, and investors to review their tax position with the end of the tax year approaching. Utilizing ISAs and being aware of changes to allowances and thresholds can help keep tax bills to a minimum. So take a look at your finances, do your research, and make the most of your tax allowances!

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