Making allowances for a taxing time ahead

In recent times, however, allowances have changed mid year, resulting in well-intentioned planning being thrown out and the "lose it" scenario occurring without time to decide whether you actually want to "use it".

With an election just passed, the UK's finances are still in desperate need of assistance and tax allowances could still be a soft target. Therefore, the message is simple – use it now rather than wait until 5 April.

What can you do? Firstly use your cash ISA allowance, which allows a UK resident over the age of 16 to deposit up to 5,100 each year into a cash ISA. So, for a joint household, 10,200 can be sheltered from tax on the interest and, if this is repeated each year, the tax-free amount can be significant.

Currently, interest rates are low and, with a typical cash ISA paying about 3 per cent variable, tax savings are just over 61. If this exercise is repeated yearly then, in five years' time, the amount in the ISA is 55,778. If we assume an interest rate of 5 per cent then, at the end of that year, the tax saved on the interest will have increased to 558.

You should also consider using your stocks-and-shares ISA allowance of 10,200 each year. With a potential rise in capital gains tax looming, this makes good financial sense. For those reaching retirement, being able to supplement their income with a stocks-and-shares ISA, which provides tax-free income, can prove very valuable. Remember that cash ISAs can be transferred to a stocks-and-shares ISA without losing their tax benefit, and this can greatly assist in boosting income.

For those over the age of 65, the income tax personal allowance is 9,490, which means that a couple could shelter almost 19,000 of income. By using stocks-and-shares ISAs to supplement this income, the overall household income free from tax could be quite substantial.

Younger people still in the "accumulation" stage should combine pension planning with ISA planning to make sure target retirement income is the most tax efficient possible. Independent financial planners can now help you determine your taxable income for different retirement ages, allowing informed choices.

Last year, we saw mid-year pension legislation affecting the amount that could be paid into pension plans for higher-rate tax payers. It is worth remembering that higher rate tax relief is still available. If you can plan to receive 40 per cent income tax relief while saving and, when you retire, have your income taxed at 20 per cent, that can prove to be very effective.

There are other less obvious allowances, such as the annual 3,000 inheritance tax allowance. If this has not been used in a previous tax year, it can be doubled to 6,000 and gifted free from inheritance tax.

Over the next few years the UK treasury will require additional funding, so it makes sense to review your financial position and ensure you are using your allowances to the best of your financial ability.