As another tax year draws to a close, there are some things you should be doing now to make full use of your allowances. Getting your finances organised now can ensure you’re not forced to make last-minute decisions or end up missing out as April draws closer.
So, what should you do before we reach the end of the tax year?
1. Check your pension contributions
How much have you paid into your pension this tax year?
For most people, a pension is the most efficient way to save for retirement. This is due to the tax relief you receive on contributions. You receive tax relief at the highest rate of Income Tax you pay, so either 20%, 40% or 45%. It delivers a welcome boost to your savings. As a result, it’s worth adding to your pension before the tax year ends if possible.
However, there is a limit to how much you can contribute to a pension and still receive tax relief. So, you need to check your allowance and contributions.
The annual allowance for pensions is related to how much you earn. Usually, it’s either £40,000 or 100% of your annual earnings, whichever is lower. But if your income is greater than £150,000, you could be affected by the tapered annual allowance. This reduces your allowance by £1 for every £2 you earn over the threshold to a minimum allowance of £10,000. It’s important that you understand what your allowance is.
Unused pension allowance can be carried forward for three years. So, if you haven’t made use of your allowance from the 2017/18 tax year, you will lose it.
2. Review your 2019/20 ISA usage
Individual Savings Accounts (ISA) can be an excellent way to save and invest.
Should you choose a Cash ISA, the interest earned is tax-free. While with a Stocks and Shares ISA, your gains are free from Income Tax and Capital Gains Tax. This helps your money go further and minimise your tax bill.
Each tax year you can place up to £20,000 into ISAs. You can choose to deposit this amount in a single ISA or spread the allowance across several. As a result, you can place a portion of your allowance in cash and invest the rest should you wish to. This can help you strike the right risk level for your goals and financial plan.
Your ISA allowance resets at the start of each tax year and can’t be carried forward. So, if you don’t use your 2019/20 allowance before April 5, you will lose it.
3. Maximise your dividend allowance
If you receive dividends, this allowance can be useful for reducing your tax liability.
The rate of tax you pay on dividends varies depending on your income. However, it can be as high as 38.1% for additional rate taxpayers. As a result, understanding your tax-free allowance and managing it when you receive dividends is important.
The dividend allowance is £2,000 per tax year. It’s important to note that shares held within an ISA don’t count towards your dividend allowance. If your income is below the personal allowance, dividend income can also be covered by this.
4. Consider your 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 investments that aren’t held in an ISA or a second property.
Each tax year, you can make a profit of up to £12,000 without having to pay CGT. However, if you exceed this allowance, you may find you face a tax bill. The rate for CGT can be as high as 28%, however, this varies depending on your Income Tax band and the type of asset you’re disposing of. If you’re close to the CGT threshold or haven’t used much, timing when you’ll dispose of assets can save you money.
If you don’t use your CGT allowance this year, you will lose it as it can’t be carried forward.
5. Boost savings for children or grandchildren
If building a nest egg for children or grandchildren is a priority, there are allowances to keep in mind here too.
A Junior ISA (JISA) offers the same benefits as an adult ISA. You can either save in a Cash JISA or invest with a Stocks and Shares JISA, without paying Income Tax or Capital Gains Tax. However, the annual limit is lower at £4,368. It’s a useful way to start a savings fund that will be valuable when they reach adulthood, perhaps helping them through university or to use as a deposit on a first home.
Children will be able to manage their JISA when they turn 16 but won’t be able to make withdrawals until their 18th birthday. Unused JISA allowances will be lost, they cannot be carried forward.
Another area to consider is paying into a pension for a child. This can be a way to save for their long-term future and thanks to tax relief and the compounding effect, contributions can add up quickly. However, a child won’t be able to access any of the savings until they reach retirement age, so it’s not the right option for everyone.
The maximum amount that can be paid into a child’s pension is the same as an unemployed person; £2,880 per tax year. With tax relief added, this will be increased to £3,600.
6. Make gifts to loved ones
Could your estate be liable for Inheritance Tax (IHT) when you pass away?
If so, you should look at ways you can reduce the tax bill your loved ones will face, reducing the amount that goes to the taxman.
One of the ways to do this is to take advantage of the gifting allowance. This allows you to give away £3,000 annually, which is considered immediately outside your estate for IHT purposes. Gifts exceeding this amount may be classed as potentially exempt transfers. This means should you die within seven years of the gift being received, it may still be considered part of your estate. As a result, giving some of your wealth to loved ones now can reduce your IHT liability.
The gifting allowance can be carried forward for one year, so you need to use your 2018/19 allowance before April 5. The gifting allowance is per individual, so as a couple you can gift loved ones £6,000 each tax year.
If IHT is a concern for you, please get in touch. There are often many ways that an IHT bill can be reduced if you take a proactive approach.
Setting out your goals for 2020/21
As you assess your finances before the end of the current tax year, it’s a good time to plan for 2020/21 too.
Setting out your goals and steps to take to achieve them now can help ensure you’re not left with last-minute decisions to make next year. It’s a chance to review what your goals are and how your finances can help you reach them. Making use of allowances that reset each year is one aspect of this but should be assessed in the wider context of your financial goals.
Please contact us to discuss your finances before the end of the tax year and your plans beyond this. We’re here to help you make the most of your allowances in line with wider aspirations.
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.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
The Financial Conduct Authority does not regulate tax and estate planning.