From 6th April 2024, the dividend allowance falls by 50% from £1,000 to £500. This could mean a big tax bill for those holding income-paying investments outside of an Individual Savings Account (ISA) and Self Invested Personal Pension (SIPP).
The capital gains tax (CGT) allowance is also reducing significantly to £3,000 – down from £12,300 a few years ago. This could be your last chance to make a significant switch from general investment accounts to tax-efficient accounts to shelter your hard-earning savings and investments.
It’s also expected millions will have to start paying tax on their savings interest, as interest rates have gradually risen to their highest levels in 15 years. Tax on interest can range from 20%-45%, depending on your tax band, so it’s essential to shelter your savings and investments from tax where possible.
Have you taken advantage of all the tax allowances available to you? Here’s how to save tax with an ISA or self-invested personal pension (SIPP), ahead of the tax year deadline.
Four ways to save on tax in 2024
1. Open a Stocks & Shares ISA
A Stocks and Shares ISA is a type of investment account where individuals can invest in a variety of investments, such as shares and bonds, to generate a return on their investments.
The main benefit of a Stocks & Shares ISA is tax related. Any gains you make from your investments, and any dividends paid out, are tax free, so you won’t be subject to Income Tax and CGT. In a world where taxes are rising, it’s important to take advantage of government incentives where possible.
Our Stocks & Shares ISA is flexible so you can access your money at any time. You can add and withdraw your money through the year, providing you don’t go over your annual allowance.
You can shelter up to £20,000 from UK tax each year. So if you haven’t contributed to an ISA for the 2023/24 tax year, you have until midnight on 5th April.
2. Start a Self-Invested Personal Pension
A SIPP is a type of pension that lets you make your own investment decisions from a much wider range than most workplace pensions. This means the potential to achieve a stronger return and build up your retirement pot quicker over the long term. Of course, investments can fall as well as rise so there’s no guarantees.
Making use of pensions such as a SIPP is one of the best ways to save on tax. You benefit from growing your investments without having to worry about paying UK Income Tax or CGT. Another benefit of the SIPP is that you receive between 20% and 45% tax relief on your personal contributions as an incentive to save towards your retirement. It means £1,000 [RM1] added to your SIPP could cost you as little as £550.
Like with most pensions, you usually need to be at least 55 (rising to 57 in 2028) before you can access the money in a SIPP. Follow the link to find out more about how SIPPs work.
3. Transfer from a General Investment Account
With further cuts to the CGT and dividends allowance, this could be your last chance to shelter your investments from tax by making a significant shift from holding investments in a general investment account to ISA or SIPPs.
The process involves selling investments in a general investment account, transferring the proceeds to an ISA or SIPP and then reinvesting into the stock market. This can be into the same stock (known as a Bed & ISA), or a different stock of your choice. Please note, selling investments in a general investment account could be subject to CGT and that dealing charges apply when buying and selling holdings.
Why not consider consolidating your investments under one roof? It’s easy to lose track of your pension pots and other types of investments accounts you’ve built up over the years.
4. Review and rebalance your investments
The end of a tax year is a good time as any to review your investments and rebalance your portfolio, if necessary.
Rebalancing involves selling some of your investments that have performed well, and reinvesting into other areas which haven’t done so well. This helps to restore the weighting in your portfolio between shares and bonds to stay aligned with your risk appetite and investment goals. Rebalancing is an important exercise for any investor, particularly if you’re holding investments outside an ISA or SIPP.
Top slicing your investments that have done well can contribute towards utilising your CGT allowance for the current tax year. Unlike losses, which can be carried forward into future years, profit is taxable in the same year as you crystalise your gain, so it makes sense to use your CGT allowance each year where possible.
It’s also a good idea to review your investment strategy from time to time, especially in the years leading up to retirement. Talking to an investment professional can make sure your investments stay aligned to your changing needs.
Find out about our Investment Portfolio Review service
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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