5 Annual Allowances and Exemptions

The 2023/2024 tax year ends on 5th April; this is also the deadline for using some or all of the annual investment* and tax+ allowances, and exemptions offered to individuals in the UK. Due to the majority of these having a “use them or lose them” status, it is important to explore how annual allowances and exemptions can be used as part of a wider financial plan.

In this article, we will introduce five of the annual allowances and exemptions.


1. The Individual Savings Account (ISA) Allowance

The ISA allowance is the maximum amount to be paid into tax-advantaged ISA wrappers in a tax year. The annual allowance for an ISA is currently £20,000. Investments within an ISA are protected from UK tax, meaning they can produce income or grow in value without producing a tax bill.

A Stocks and Shares ISA can be a key component of a financial plan and is commonly funded by a lump sum payment or regular payments. It is also possible to consolidate previous tax years’ ISAs into a single ISA. Investors add funds to the ISA to get the tax advantages while maintaining the ability to access the funds when they need them.

The ISA annual allowance cannot be carried forward to future years and resets on the 6th of April each year.

2. The Pension Annual Allowance

The pension annual allowance is the maximum amount you can contribute to your pensions in the tax year without suffering a tax charge. Personal contributions will benefit from tax relief if they don’t exceed your UK-relevant earnings in the year.

The annual allowance for a pension is currently £60,000, having increased from £40,000 last year, but this amount is reduced for the highest earners or people who have flexibly accessed their pension. Unlike an ISA, investments within a pension are sheltered from UK tax but are subject to UK tax on withdrawal apart from the tax-free cash element.

A pension is the foundation of retirement planning and is usually funded by regular payments. Investors add funds to the pension to build retirement funds and obtain tax advantages but cannot reaccess the funds until normal retirement age. The normal retirement age is 55 but will increase to 57 in April 2028.

The pension annual allowance can be carried forward for up to three tax years if eligible and replenished on the 6th of April each year, meaning there is ample opportunity to designate funds for your retirement.

3. The Dividend Allowance

The dividend allowance is the dividend income an individual can earn during the tax year before income tax is payable.

In 2023/2024, the dividend annual allowance is £1,000. Dividend income arises most commonly from the direct ownership of shares in a company or via a collective investment, such as a unit trust, and is often used to supplement income from employment or other savings. Dividends within ISAs and pensions are not taxable and do not count towards the allowance.

In the 2022 Autumn Statement the Government announced that the Dividend Allowance will be decreasing to £500 from 6th April 2024. This will limit the level of dividends that can be received tax-free.

The ownership of shares as part of a diversified portfolio allows investors to receive dividend income and use the dividend allowance. Furthermore, the value of the shares can also increase over time, allowing the investor to use the next allowance – the capital gains annual exempt amount.

The dividend allowance cannot be carried forward to future years and resets on 6th April each year.

4. The Capital Gains Annual Exempt Amount

The annual exempt amount is the amount of net capital gains an individual can make during the tax year before capital gains tax is payable.

In 2023/2024, the annual exempt amount will be £6,000. Capital gains can arise from selling various assets, including shares and property. Capital gains within ISAs and pensions do not count towards the allowance.

In the 2022 Autumn Statement, the Government announced that the Capital Gains Annual Exempt Amount will be decreasing to £3,000 from 6th April 2024. This will limit the level of gains that can be received tax-free.

The ownership of shares and property allows investors to benefit from the potential increases in the asset’s value. If the value of the gain is within the annual exempt amount, there is no tax to pay on sale. Particularly for shares, which can be sold one at a time or in tranches, there is an opportunity to sell the right amount each year to use the annual exempt amount. If you are currently holding assets with large gains, it may be worth considering realising these gains before the allowances are decreased in April.

The annual exempt amount cannot be carried forward to future years and resets on 6th April each year.

5. The Inheritance Tax Annual Gift Exemption

The annual gift exemption is one of the ways of making gifts that are classed as being immediately out of the donor’s estate for inheritance tax purposes. The annual gift exemption is currently £3,000, and there are various ways the gift can be made.

Gifting can be a key component of inheritance tax planning, and the £3,000 annual gift exemption is useful for people who wish to reduce the inheritance tax.

The annual gift exemption can be carried forward for up to one tax year as long as the current tax year exemption is also being fully used that year and resets on the 6th of April each year.

Summary

There are a variety of annual allowances and exemptions available to individuals in the UK, which can be used to place money in tax-advantaged wrappers or mitigate liability to income tax, capital gains tax or inheritance tax. Most annual allowances are lost at the end of the tax year, so it is important to identify if there is a prudent way to utilise the available allowances.

If you would like to discuss any of the allowances in this article or investment planning and tax planning more generally, please contact us on 01903 534587.

* The value of investments can increase or decrease so you may get back less than you invested

+ The Financial Conduct Authority does not regulate tax advice