As we approach winter, we are all too aware of the need to wrap up at this time of year. And, as we are currently experiencing a global energy crisis, the need for extra layers is now more relevant than ever! Given the announcement made by the Chancellor in today’s Autumn Statement, there is also a greater need for our money to be wrapped up to keep it protected from the elements. The wrappers that I refer to are, of course, pensions and ISAs, and the elements being tax.
From April 2023, the 45% tax threshold for income tax has been lowered from £150,000 to £125,140, meaning that those with income of over the latter will potentially be paying up to an additional £1,243 a year in tax.
However, pension rules have not been changed, meaning that individuals are still entitled to tax relief on their contributions at their highest marginal rate(s). The incentive to consider starting, or even increasing, current pension contribution levels for individuals affected by this tax rise has therefore just increased.
The Chancellor also announced reductions to the Capital Gains Tax annual exempt amount from the current £12,300 ultimately to £3,000, and in the Dividend Allowance from £2,000 to £500, from April 2024. Similarly, there is a greater argument for transferring existing investments, such as stock and shares and investment funds, that are not already held in tax-efficient wrappers such as pension and ISAs into them. By transferring into a pension, they will potentially immediately benefit from the uplift of tax relief as outlined above whilst transfers into ISAs will mean that any growth or income going forward will be free from any personal tax.
Whether it be through pension or ISA contributions, or a combination of the two, the fact is that sensible regular utilisation of these allowances can reap significant tax benefits – be that now but also importantly in the future.