Autumn Statement – Investment allowance considerations
Changing allowances, especially for Dividends and Capital Gains next year and the year after, mean that making full use of the investment allowances available to you will become increasingly important and valuable.
24th November 2022
Lewis Dyer See profile
Ensure you have used your annual ISA allowance of up to £20,000 (£40,000 for a couple) before April 6 each year to protect your investments from suffering any tax.
If you are still working, there were no changes to pensions in the autumn statement and you can still make contributions of up to £40,000 each tax year. Additional rate tax relief of 45% is now available to those earning over £125,140 and as discussed above there are several bands where tax relief can be even higher. With stealth taxes increasing taxation this makes pension planning potentially even more valuable.
Planning in this area is complicated and you should take advice. Sometimes it is possible to make larger contributions if you have unused pension allowances from previous tax years. Also pension allowances can be reduced for those with income above £200,000 and this is an area where advice should be sought.
Current pension tax benefits are still very generous and there remains the risk they could be cut in the future.
The lifetime allowance, the maximum you can have in pensions without incurring a tax charge remains at £1,073,100 but unlike the other tax allowances the freeze has not been extended until 2028. Planning around this limit remains the same and while it may be appropriate to stop paying contributions as you approach the maximum, this may not always be the case. It is essential that anyone with significant pension funds approaching the lifetime allowance seek advice to understand the implications on them and more importantly, any action they should be considering.
If you’re saving for children or grandchildren, you can fund a Junior ISA (JISA) for someone under the age of 18, Once it is set up by a parent or guardian, £9,000 (2022/23) can be invested each year. A Junior ISA can be a good option as it grows tax-free and they cannot access it until they reach 18 – but it is theirs to spend how they want to after that.
Tax efficient gifting using pensions
A gift that costs you £2,880 can be worth £3,600 when made to a pension fund.
Pension contributions for non-taxpayers and particularly young children or grandchildren seems very generous – contributions can be made for a child up to £2,880 each year and attract £720 tax relief.
Pension funds can provide a valuable benefit even for young children. Setting up a pension fund early may mean later in life when the child has lots of other financial responsibilities, they will need to direct less of their income to pensions as they may already have a sizeable pension pot thanks to those contributions paid when they were young.
For older children who are working and higher rate taxpayers, gifting funds to make pension contributions can be very worthwhile tax wise. For each £1,000 gifted, this can secure tax relief worth £500.
While making gifts into an investment that cannot be accessed until retirement will not be for everyone, the fact that the recipient cannot immediately access the money may be desirable.
There are limits on the maximum amount that can be paid into pensions so you should take advice before making third party pension contributions.