Sarah Bradford explores options for using 2023/24 tax allowances so they are not wasted.
As the tax year draws to a close, it is prudent to review one’s 2023/24 tax allowances and consider whether there is scope for utilising any unused allowances so they are not lost.
Tax allowances provide the opportunity to earn income and realise gains tax-free. However, most allowances are lost if they are not used in the tax year to which they relate.
Personal allowance
The personal allowance is set at £12,570 for 2023/24. However, it is reduced by £1 for every £2 by which adjusted net income exceeds £100,000, being lost entirely once adjusted net income reaches £125,140. The allowance for 2023/24 is lost if it is not used in the 2023/24 tax year.
If you have yet to use your personal allowance, you may wish to consider ways to boost your income in 2023/24 to take advantage of the opportunity to earn income tax-free. This may be achieved by taking on additional work, through self-employment or by taking a salary, paying a bonus or taking dividends from a personal company.
If you are in danger of losing some or all your personal allowance as your adjusted net income is approaching £100,000, there are steps that you can take to keep your income outside the abatement zone. If you have a personal or family company, you could consider delaying bonus or dividend payments until 2024/25. Alternatively, if you have not used your available annual allowances, you could make tax-relieved contributions to your pension to reduce your adjusted net income. Making contributions to charity has the same effect.
Married couples and civil partners may be able to make use of the marriage allowance. If one partner is unable to use their personal allowance in full, they can transfer 10% of it (as rounded up to the nearest £10) to their spouse or civil partner, as long as the recipient does not pay tax at a rate higher than the basic rate. For 2023/24, the marriage allowance is £1,260, saving a couple up to £252 in tax.
Dividend allowance
The dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. For 2023/24, it is set at £1,000. Like the personal allowance, it is lost if not used in the tax year.
If you have a personal or family company and you have sufficient profits available, consider paying dividends before 6 April 2024 to ensure that shareholders’ dividend allowances are not wasted. The dividend allowance falls to £500 for 2024/25, so delaying a dividend payment beyond 5 April may mean that not only 2023/24 allowances are lost, but also that dividends which would have been tax-free if paid in 2023/24 will be taxed in 2024/25.
Remember, dividends can only be paid from retained (post-tax) profits and unless the company has an ‘alphabet’ share structure, they must be paid in proportion to shareholdings.
Personal savings allowance
Only basic and higher rate taxpayers benefit from a personal savings allowance. The allowance (which for 2023/24 is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers) allows interest to be received tax-free. Additional rate taxpayers do not receive a personal savings allowance.
It is prudent to review how your investments are held. Rising interest rates mean that savers who have not previously had to pay tax on their interest because it fell within their savings allowance may find that there is now some tax to pay. Inflationary pay rises combined with a lower additional rate threshold will have pushed some former higher rate taxpayers into the additional rate band, stripping them of a personal savings allowance in the process.
If you do not benefit from a personal savings allowance or your interest exceeds your allowance, you may wish to consider options for holding savings in tax-free wrappers, such as individual savings accounts (ISAs), or maybe investing in shares if you do not make use of your dividend allowance. For 2023/24, the ISA allowance is £20,000. It is sensible to take investment advice before making any decisions.
Spouses and civil partners could review how their savings are held to ensure that best use is made of available personal savings allowances and tax is not paid unnecessarily.
Capital gains tax annual exemption
The capital gains tax (CGT) annual exempt amount works in a similar way to the personal allowance, but for CGT purposes. Each individual is able to realise net gains (chargeable gains for the year less allowable losses for the year) of £6,000 in 2023/24 before paying any CGT. Where set against residential property gains realised by a higher rate taxpayer, the allowance is worth £1,680 (i.e., £6,000 @ 28%).
Spouses and civil partners each have their own allowance. The no gain, no loss rules applying to transfers between spouses and civil partners mean that an asset or a share in an asset can be transferred from one spouse or civil partner to the other prior to sale to make use of their available annual exempt amounts.
As with income tax allowances, the CGT annual exempt amount is lost if not used in the tax year. If disposals are on the horizon which are likely to realise a gain and the annual exempt amount for 2023/24 remains available, consideration should be given to making the disposal before 6 April 2023. As the annual exempt amount is to fall to £3,000 from 6 April 2024, delaying the disposal until 2024/25 may prove costly.
Pension annual allowance
Individuals are able to make tax-relieved pension contributions to registered pension schemes of up to the higher of 100% of earnings (or £3,800 if greater) and their available pension annual allowance each tax year. Tax relief is given at the taxpayer’s marginal rate of income tax.
For 2023/24, the allowance is set at £60,000 but is reduced where both threshold income (broadly income excluding pension contributions) exceeds £200,000 and adjusted net income (income including pension contributions) exceeds £260,000. The allowance is reduced by £1 for every £2 adjusted net income exceeds £260,000 until it reaches £10,000 (which is the minimum amount of the allowance for 2023/24).
If the allowance is not used in the tax year, it can be carried forward for up to three years. However, allowances from previous years can only be used once the current year’s allowance has been used in full.
For 2023/24, once the current year’s allowance has been used, further contributions can be made (subject to the earnings cap) to mop up allowances from 2020/21, 2021/22 and 2022/23. Allowances from 2020/21 will be lost if not used by 5 April 2024. For 2020/21, 2021/22 and 2022/23, the annual allowance was £40,000, threshold income was £200,000, the adjusted net income threshold was £240,000 and the minimum amount of the allowance was £4,000.
Where a pension pot has been flexibly accessed having reached age 55, a lower annual allowance (the money purchase annual allowance) applies. This is set at £10,000 for 2023/24.
For 2023/24 onwards, lifetime allowance charges do not apply if tax-relieved pension savings exceed the lifetime allowance. The lifetime allowance itself is abolished from 6 April 2024. This paves the way for individuals whose pension savings have reached the level of the lifetime allowance to make further contributions.
Contributions made by an employer count towards the annual allowance. Where a director who takes a small salary plus dividends is unable to utilise the annual allowance in full due to the operation of the earnings cap (dividends do not count as earnings), it can be efficient for contributions to be made by their personal or family company.
Inheritance tax annual exemption
The inheritance tax (IHT) annual exemption allows you to give away £3,000 each year without it being added to the value of your estate.
It is unusual in that if it is not used in one year, it can be carried forward to the next tax year. If the allowance was not used in 2022/23, gifts of up to £6,000 can be made inheritance tax-free in 2023/24. It is available in addition to other IHT allowances for gifts.
Practical tip
Review 2023/24 personal allowances and consider whether unused allowances can be used before the end of the tax year, so that they are not wasted.
