The end of the 2022/23 financial year is in sight, with just 4 weeks to go until we clear the decks and start afresh. But before we get there, here are a few timely reminders so that you can be sure that you’ve dotted the i’s and crossed the t’s for the current year.
We’re all familiar with ISAs, Individual Savings Accounts, the handy tax wrapper that allows your savings to grow free from capital gains tax on growth and income tax on interest and dividends. Each year every UK taxpayer has an ISA allowance, or a cap, on how much they can invest in ISA accounts. For 2022/23, that allowance is £20,000 per person.
There are a number of different types of ISAs (read more on that here) and importantly, your £20,000 allowances is the total amount you can invest across all different types of ISAs. So for example, you could invest £10,000 in a Stocks & Shares ISA and £10,000 in a Cash ISA. You can’t invest £20,000 in both. You are also restricted in that you can only open one of each type of ISA in each financial year.
The ISA allowance is a ‘use it or lose it’ allowance, meaning that once the clock strikes midnight on 5th April, any unused allowances will be lost. If you’ve got any ISA allowance remaining, consider this your reminder to try and use it where you can.
At TILLIT, whilst we offer Stocks & Shares ISAs to our customers and we’re advocates for long term investing, we also appreciate that the short-term outlook is looking mixed for investors right now. If you have any of your ISA allowance left for this year and you’ve got savings in the bank, but you don’t want to put those funds to work by investing them just yet, you could look into opening a cash ISA for the shorter-term. Investors are able to transfer freely between Cash ISAs and Stocks & Shares ISAs so you will be able to consolidate this account into your investment ISA later down the line if you wish.
GIAs, or General Investment Accounts, are simple investment accounts. They are not tax wrappers. Investments held within GIAs do not benefit from being sheltered from capital gains tax or income tax, and there is no limit to how much you can invest, or how many GIAs you can open.
So, why do they feature on the year-end checklist? The answer; although they don’t have any limits or allowances directly, the management of your investments held within a GIA can count towards other tax allowances. Namely, the capital gains tax exemption and the dividend allowance.
Starting with the Dividend Allowance, for 2022/23, this is £2,000 per person. This means that every UK taxpayer can earn up to £2,000 each year in dividends with no income tax payable. Any dividends earned in excess of this allowance will be taxed at your marginal rate for income tax.
For most investors, dividends received are outside of their control; they don’t determine how much they receive each year. However, in the 2022 Autumn Statement, Chancellor of the Exchequer Jeremy Hunt announced that the dividend allowance will be cut to £1,000 per person for the 2023/24 financial year.
Not every investment pays dividend income and so it is possible for investors to control, to a certain extent, how much income they receive each year. So whilst you can’t control what you received in income this year, now might not be a bad time to take stock of how much you have earned in dividends during the current year so that you can adjust your portfolio if you wish (and if you can) to try and stay within the new allowance next year.
Moving on to the Capital Gains Tax exemption, this is currently £12,300 per person for 2022/23. This means that up to £12,300 of realised gains (i.e. the investment must be sold to ‘lock in’ the gain) can be earned free of capital gains tax. Gains realised beyond this allowance are taxed at your marginal rate. This allowances is set to be reduced to £6,000 per year as of 6th April 2023.
As we approach the end of the financial year, many investors will be looking at how many gains they have already realised this year and seeing if there is any opportunity to maximise this allowance before the year ends. This would be done by selling a holding in your GIA in order to ‘realise’ that gain. Equally, if you’ve already exceeded the capital gains tax exemption this year (i.e. you’ve realised more than £12,300 of gains), you might consider selling a holding that’s at a loss in order to ‘lock in’ that loss and offset your aggregate gain position.
It is important to bear in mind that in order to manage your capital gains tax exemption in this way, you cannot buy-back the same investment that you’ve sold for a minimum of 30 days. Many investors will swap into a similar fund to act like a proxy, or use the sale as an opportunity to reposition their portfolio. If you’re not sure what to invest in during that 30 day window, you can always stay in cash, but just remember to reinvest at some point!
Whilst we don’t currently have a Self Invested Personal Pension available on TILLIT, we can’t produce an end-of-financial-year guide without mentioning pensions!
Each year, every UK taxpayer can contribute up to £40,000 (gross) into their pension*. Provided you have sufficient earnings to do so (your total contributions to a pension cannot exceed your pensionable income in that year), you can also carry forward unused pension contribution allowances for the past 3 years.
As we approach the end of the financial year, it is a good moment to take stock of how much you have allocated to your pension this year and whether or not you wish to top up your contributions before the new year. Unlike an ISA or a GIA, once you’ve added contributions to your pension you can’t access the funds until you reach retirement age; for some investors this can be off-putting, but we think that the silver lining is that pensions keep those funds separated from your wider wealth and growing for your future!
*Please note that the annual pension allowance is tapered. If you are earning more than £240,000 per annum your annual allowance for pension contributions may be restricted. You may also need to be mindful of the Lifetime Allowance which is a cap on the total value of your pension.
The world of tax allowances can be confusing, particularly so when it comes to pensions and managing your contributions. This Insight is intended to be a high level reminder of some of the allowances you might want to review and try to use before the financial year ends. But, as with all things technical, personal and tax-related, we recommend that you speak to an accountant or a financial adviser if you are unsure about how these rules and allowances could apply to you.
Date of publication: 9th March 2023
The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.
When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.