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The current tax year is almost over. Our handy checklist is designed to help you get the most out of your money and allowances for 2019/20. If you haven’t already, these are seven things you should do before the new tax year starts, otherwise, you could lose some of your allowances.
1. Make use of your ISA allowance
ISAs are a great way to save and invest. Each year you can add up to £20,000 into ISA accounts, and you won’t have to pay tax on interest or returns. Investors do no pay any personal tax on income of gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers
If you have the capital and haven’t reached the allowance limit yet, it’s worth making some additional deposit in the coming months.
When using an ISA, you have two main options:
- Cash ISA: A Cash ISA pays interest on your deposits. Your money is secure and protected under the Financial Services Compensation Scheme, assuming you stay within the limits. However, interest rates are low, and you may find that the value of your savings decreases in real terms once you consider inflation.
- Stocks and Shares ISA: With this type of ISA, your money is invested in stocks and shares. This gives you an opportunity to create returns that outpaces inflation. However, there is a risk that investment values will fall. It’s important to keep in mind that you can choose the level of investment risk you want to take.
There are other ISAs too, which can be useful in certain circumstances. A Lifetime ISA (LISA), for example, may be valuable if you’re saving for your first home. However, should you choose to make a withdrawal before the age of 55 for a purposes other than purchasing your first home, you may incure a government withdrawal charge. This may mean you get back less then you paid in. If you’re thinking of using a LISA to save for retirement, it’s important to note that you won’t receive the same benefits as you would from paying into a pension, this includes tax relief and employer contribitions. You should assess which option is right for you, including looking at how your current and future entitlement to means-tested benefits could be affected.
Alternatively, an Innovative Stocks and Shares ISA may be suited to those with a high net worth and high-risk attitude to investing. This type of ISA allows you to engage in peer to peer lending (P2P). It may not be possible to sell or trade P2P agreements at market value on a secondary market
You can split your annual allowance between several ISA accounts, should you choose to, including different account types. As a result, you can both sain cash and invest each tax year.
If you don’t use your ISA allowance before the end of the tax year, it will be lost.
2. Top-up your pension
Your pension is a tax-efficient way to save for retirement. However, there is an annual limit to keep in mind. You can pay in more than the annual allowance, but this won’t qualify for tax relief and you may find you face an unexpected tax bill as a result. If you’ve yet to reach your pension annual allowance and you have the capital to invest long term, it can be worthwhile to top it up.
Your annual allowance will depend on how much you earn. Usually, it is £40,000 or 100% of your annual earnings, whichever is lower. This includes the contributions you make, as well as those made by your employer or other third parties.
However, if you’re a higher rate taxpayer, you may be affected by the tapered annual allowance. If you earn more than £150,000, your annual allowance will reduce by £1 for every £2 you earn over this threshold. The maximum reduction is £30,000. So, if you earn £210,000, your annual allowance would be just £10,000.
Crucially, your pension annual allowance can be carried forward by up to three years. So, if you didn’t make full use of your allowance in the previous three years, you can make further contributions.
3. Provide a gift to loved ones
If Inheritance Tax is a concern for you, using your gifting allowance is one way to pass wealth on to your loved ones now.
If the entire value of your estate, this includes all your assets, such as property, savings, investment and material assets, is more than £325,000, your estate may be liable for Inheritance Tax. Gifts that are given within seven years of your death may also be included in your estate for Inheritance Tax purposes unless they are part of the gifting allowance.
Each tax year you can gift up to £3,000 without having to worry about Inheritance Tax; it will be immediately considered outside of your estate. If you didn’t use this allowance, it can be carried forward for one year. So, if you didn’t make use of the gifting allowance in 2018/19, now is your last chance to do so.
Are you worried about Inheritance Tax? There are often steps you can take to minimise liability and ensure you pass as much as possible on to loved ones, please get in touch to find out more.
4. Utilise the Capital Gains Tax allowance
Capital Gains Tax (CGT) is a tax you pay when you sell certain assets and make a profit. This could include a Buy to Let property or investments that aren’t held in an ISA.
The rate of CGT will depend on the asset you’re selling but it can be as high as 28%. However, each tax year, you can make up to £12,000 profit without being liable for CGT. As a result, timing when you make a sale could save you money.
If you don’t make full use of your CGT allowance, you aren’t allowed to carry it forward to next year.
5. Consider the dividends allowance
If you own shares in a company and receive dividend payments, you may need to pay a tax on this if you’ve already used your allowance. The rate of dividend tax will depend on your tax band. For basic rate taxpayers, it’s just 7.5%. However, if you’re a higher rate or additional rate taxpayer, the dividend tax rate increases to 32.5% and 38.1% respectively.
The dividend tax allowance for the current tax year is just £2,000 after it was decreased from £5,000 in 2017/18.
The dividend allowance doesn’t apply to shares held within an ISA. Dividend payments can also use your annual Personal Allowance. This is the amount you can earn from all sources of income tax-free in a single tax year, it’s currently £12,500.
6. Fill in National Insurance gaps
Your National Insurance contributions play a role in how much State Pension you receive. To be entitled to the full State Pension, which will be £9,110.40 annually for 2020/21, you must have 35 years on your National Insurance record.
Why is this important as the end of the tax year approaches? You can make additional contributions to cover gaps going back over the last six years, with the deadline by the end of each tax year. If you have gaps that could affect your State Pension, it’s often worthwhile making these additional payments to receive the full amount. Keep in mind though, if retirement is still some way off, you may still hit the 35 required without making extra contributions.
7. Build a nest egg for children and grandchildren
It’s not just your own allowances that reset at the start of a new tax year. Those that affect saving for children do too.
If you’re putting money away into a Junior ISA (JISA), for example, you should maximise the amount you can tax-efficiently save if possible. Each tax year, you can add up to £4,260 into a JISA. As with an adult ISA, the interest from a Cash JISA or returns from a Stocks and Shares ISA are tax-efficient. The JISA allowance can’t be carried forward, so if you don’t use it, it’ll be lost. Money paid into a JISA is locked away until the child turns 18 when they’ll be able to access it as they wish.
You can also pay into a child’s pension. Individual’s that don’t earn an income, including children, can add up to £2,880 to a pension each tax year and benefit from tax relief. Deposit the maximum amount and tax relief effectively means your investment grows to £3,600 instantly. Pension contributions won’t be accessible until the child reaches retirement age. At the moment, pensions can be accessed at 55, but this is rising.
If you’d like to discuss your allowances as the end of the tax year approaches, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Tax treatment varies according to individual circumstances and is subject to change.
The value of your investments can go down as well as up and you may not get back the full amount you invested.
Estate planning is not regulated by the Financial Conduct Authority.