Expert advice on how to make the most of your tax allowances
If you’re trying to manage your finances as effectively as possible there’s one vital aspect you need to consider: your tax allowances.
A few key steps can help you ensure you make the most of your tax allowances, and build your wealth more tax efficiently.
Read on to find out what these steps are. You may also consider consulting with an investment and wealth management expert before you implement any suggestions.
Income tax allowance
One of the first, and most important tax allowances to be aware of is your income tax allowance.
This is a certain amount of your annual income that is sheltered from tax, and it’s also referred to as your Personal Allowance.
Currently, the standard Personal Allowance is £12,750. This means you don’t have to pay any income tax until you start earning this amount each tax year.
There are a few things you can do to make the most of your income tax allowance, including:
- Utilising your marriage allowance
With your marriage allowance, you’re able to transfer £1,260 of your personal allowance to your spouse or civil partner.
This is beneficial for those who have a partner earning below the personal allowance threshold. As a result, you can add an extra £1,260 of tax-free allowance to your partner, without sacrificing any tax charges for your own income if it’s below the threshold regardless.
- Paying money into your pension
Another way to benefit from your income tax allowance is to contribute money to your pension. While this doesn’t directly increase your income tax allowance, it means you can claim tax relief on a certain amount of your income that you choose to pay into your pension.
For example, high earners are able to claim 40% tax relief, and additional rate taxpayers can claim 45% tax relief on their contributions.
Pensions also come with their own tax allowances, which are important to know if you want to grow your wealth effectively for retirement.
The first allowance to know is your annual pension allowance. This is the maximum amount you can contribute to your pension each tax year while remaining sheltered from tax. As of the current tax year, the allowance is £60,000.
In the 2023 Budget the lifetime pension allowance was abolished (the total amount you can contribute tax free throughout your life), but there still may be implications for any previous approaches you took, including the opportunity to invest more. Seek out a financial adviser if you need expert advice.
To help make the most of your pension allowances, you should consider:
- Financial planning
It’s important to create a clear outline of your future retirement goals, ideally with an expert adviser to assist you. They will help to ensure you have an accurate plan of what you want for your financial future, thus making it easier to structure your contributions in the right way to reach these goals.
- Optimising your contributions
With an adviser’s help, you can re-evaluate how much and at what times you contribute to your pension pot throughout each tax year. This will allow you to monitor and make full use of your pension allowance each year, and shelter as much of your money from tax.
Another crucial allowance to consider for your finances is from an individual savings account (ISA).
This is a certain limit you can contribute to your ISAs each tax year, where your savings – and any growth that results from this – are sheltered from tax.
The current ISA allowance is £20,000.
If you want to make the most of your ISA allowance, you can:
- Consider the benefits of each type of ISA
Make sure you diversify your ISA investments, to help optimise tax-free savings and growth. For instance, you can open both a cash ISA and stocks and shares ISA, allowing you to save money tax-free, as well as make potential profits from successful investments.
Do note, that your total ISA allowance must be shared between each type of ISA you open every tax year.
- Ensure your spouse or civil partner uses their full allowance
Since ISAs are for individuals, you and your partner will each have a £20,000 allowance, which if you each make full use of, gives you a combined total of £40,000 sheltered from tax.
Therefore, make sure your partner uses their full allowance each year, and if one partner earns more, they can ensure some of their income is used towards their partner’s allowance.
Please note, the value of your investments can go down as well as up.