The old adage ‘use it or lose it’ applies to many things: physical fitness, learning a language, or playing a musical instrument for example.
However, if you stop training you will retain some level of fitness; if you stop speaking a language the basics will always stick with you, and if you stop playing music you might get rusty, but those simple chords or scales will never leave you.
Perhaps in this context ‘use it or lose some of it’ might be appropriate.
Tax allowances on the other hand are very clear cut. If you do not use them within the tax year, you do not get another chance, which could mean that you end up paying more tax than necessary. So it makes sense to make sure you have used all the allowances you are entitled to before April 5.
Treat it like a financial spring clean
It is probably not the most thrilling item on your ‘to do’ list, but think about the feeling of satisfaction you will get at the end. Not only will you feel you are on top of your finances, but you will have made the best of your hard-earned savings, rather than let them go to the tax man.
There are some key tax allowances to be aware of.
*Your allowance can be spread across five different types of ISA: Cash, Stocks and Shares, Lifetime, Innovative Finance, and Help to Buy.
The five allowances above are not the full story – your Capital Gains Tax (CGT) annual exempt amount and dividend allowance are also important.
However, these allowances are being reduced significantly over the next few years, starting in April 2023, and are going to impact many people, so we wanted to dig a little deeper into them.
It is crucial that you are aware of whether, and if so how, they might affect you.
Changes to CGT allowance
CGT is paid on any profits you make from the sale of particular assets, such as property or stocks that are not in an ISA or pension.
How is the CGT allowance changing?
The table below provides the details, but the key takeaway here is that the CGT allowance is being slashed dramatically.
Who are the changes going to affect?
If you are disposing of assets for profit over the next couple of years, there is a very good chance you will have to pay more CGT.
CGT only applies to the sale of capital assets, such as property, jewellery, bonds, and stocks, so if you were thinking of selling such assets in the near future, it may make the most sense for you to sell them sooner rather than later in order to maximise your 2022/23 CGT allowance.
Case study – buy to let properties
People considering selling their buy to let property may need to be particularly wary.
Research from Simply Business shows that nearly 50% of landlords have either sold a property recently or are thinking of doing so soon, which is no surprise given increasing mortgage costs and increasing regulation.
If you are in that 50%, pay close attention to the following figures.
Research* shows that this year the average higher-rate landlord paid a CGT bill of £21,260 after selling their property.
Next year, this will rise by £1,770 to a bill of £23,000.
And the following year it will rise by £2,610 to a bill of £24,000.
For those who receive dividend payments, the following changes to the amount you can receive before paying tax is likely to increase your tax liability in April 2023.
With such changes imminent, it makes sense to review your financial plan to find out how they will affect you and how you can mitigate their impact.
The bottom line
We understand that it can be tricky to keep track of the allowances you are entitled to and whether you have fully utilised them, especially when so much is changing. However, our advisers can help you know where you stand and ensure you are saving as much as possible.
Your tax allowances are there to be used, but with a little time and effort, coupled with our advice, you can maximise your position and make your money work as hard as possible for you.
Based on tax legislation at the time of publication. Please be aware that there will have been changes since this was published. Speak to your adviser for the most up to date information.
