Seven tips to save on tax and bolster wealth in 2024

The personal finance landscape is set to undergo a dramatic shift in the new year - ushering in both challenges and opportunities.

The persistence of fiscal drag, changes to the pension regime ,as well the reduction of tax-free capital gains and dividend tax allowances are among the notable transformative developments set to have a telling impact on individual wealth.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, offers some tips to save on tax and bolster wealth in 2024.

1) Make the most of this tax year’s ISA allowance – leave it in cash of you can’t decide

“The tax-free ISA allowance works on an annual “use it or lose it” basis, so it makes sense to make the most of this year’s allowances - if you can afford to do so. The stakes are higher this year due to cuts in the capital gains and dividend tax allowances in April, which could have an impact on your financial planning.

“If you’re worried about the markets, you can always secure this year's allowance with cash now and take your time choosing when to invest your cash. There is no charge to do so, and it can potentially be more diligent in selecting investment opportunities. You can also drip feed it into the market if you wish.

“You can also help reduce your taxable income, by transferring assets between spouses/civil partners. Use both sets of ISA allowances: each year you can shelter £20,000 from tax in an ISA – so £40,000 between two. Couples can also effectively double gains and income they can make tax free by using both their annual exempt amounts. Only married couple and civil partners can transfer assets tax free, meaning those who aren’t could potentially trigger a tax liability.”

2) Beat reduction in capital gains and dividend tax allowances

• In April 2024, the capital gains tax allowance will cut in half from £6,000 to £3,000. The dividend tax annual allowance is being cut from £1,000 to £500.

“The shrinking capital gains and dividend tax allowances provides the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so. Shifting investments into an ISA protects future gains and dividends from the clutches of tax. Known as Bed & ISA, the process is a valuable tool as a part of a broader portfolio spring-clean strategy. The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.

“Bed & ISA is a tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient ISA – which over the long term is likely to outweigh the charges that might apply.

“The process also exists for self-invested personal pensions, called Bed & SIPP. But bear in mind withdrawals that exceed the 25% tax-free allowance will be taxed as income.” 

3) Beat fiscal drag

“We’re facing the highest overall tax burden in a generation thanks to the deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be [paying] more in tax in the years to come. Known as ‘fiscal drag’, this is the ultimate stealth tax which feels particularly tough at a time when inflation remains high. Fiscal drag hits us all – even if we don’t change tax band. That’s because as our pay rises with inflation, more and more of our pay packet is taxed and our overall tax burden increases.

“The freezing of income tax threshold and other personal allowances has bolstered the allure of paying into a workplace pension through salary sacrifice. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20% pension tax relief, turning a £80 contribution to £100. If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief.

 “Think of a pension as deferred income and this seems like a good way to reduce your overall NI bill without reducing your income, if you are happy to take it after age 55 instead.”

4) Review and consider rebalancing investment portfolio

“The building blocks of an investment portfolios are based on financial goals, time horizon and risk tolerance. As financial markets gyrate, certain assets experience outperform while others experience the opposite. Such fluctuations can cause your portfolio to veer off its intended course.

“Portfolio rebalancing is akin to tuning an instrument, where every component plays a crucial role in achieving harmonious results. Trimming the excesses and redirect funds into underperforming assets, ensures that your risk-return equilibrium remains intact. This calculated approach of buying low and selling high has the potential to bolster long-term returns.

“There isn’t a right or wrong assets mix or so-called asset allocation, but you do want to settle on the best investment mix for your situation and needs such as your goals, age and risk tolerance.

“The old rule of thumb used to be that you should subtract your age from 100 - and that's the percentage of your portfolio that you should keep in shares. For example, if you're 20, you should keep 80% of your portfolio in shares.”

5) Review your pension amid impending changes

Reviewing your pension in the new year is a prudent financial practice that can yield significant benefits. Doing so is all the more important in 2024, with a slew of changes that may force many to rethink their current retirement plans set come into effect. The abolition of the pension lifetime allowance, the introduction of the ‘pot for life’ initiative announced in the Autumn Statement and the state pension boost are among the notable changes scheduled for implementation in April.

“By staying informed about market trends and potential changes in pension regulations, you can make informed decisions and manage the necessary tweaks.”

6) Consider estate planning

“A financial new year resolution could involve estate planning to ensure the orderly transfer of assets and wealth. Creating a will is a good first step to outline your wishes regarding the distribution of assets, including properties, investments, and personal belongings. It is essential to appoint an executor who will be responsible for carrying out these instructions. Additionally, considering the potential impact of inheritance tax is crucial. There are various exemptions and allowances, but understanding how these apply to your estate can help minimise tax liabilities.

“Reviewing and updating the estate plan regularly is vital, especially in the face of life changes such as marriage, divorce, birth, or death within the family. Periodic reassessment ensures that the estate plan remains aligned with wishes. It might be worth seeking professional advice to discuss your options and the various considerations.”

7) Pay down your mortgage if you can afford to

“Overpaying your mortgage can have several benefits – especially amid the high interest rates environment. It helps reduce the overall interest paid over the life of the loan, shortens the loan term, and builds home equity faster. Always check with your lender about overpayment terms and any potential penalties. An early repayment charge is typically levied on payments made beyond the agreed overpayment allowance - often calculated as a percentage of your mortgage balance.

“Fixed-rate mortgage deals have dropped in recent weeks, with rates considerable down from just a few months ago amid market expectations central interest rates will fall faster than expected in the new year. This is good news for borrowers. No one short of a functioning crystal ball will know exactly when mortgage rates reach their lowest point.”