Tax year end countdown
The approach of the financial year-end marks a final opportunity to ensure you have used all your tax-saving allowances. Stephen Palmer of Cranwell Wealth Solutions in Uckfield explores your various options here.
For pension savers, no news was good news in last year’s Budget. Widespread predictions of cuts to pension tax relief came to nothing, and the current pension tax regime has survived to see another tax year.
For the vast majority of working people, the annual allowance is £40,000 (or 100% of earnings if less). If you’re in a position to use some or all of it, and are not in danger of breaching the £1.03 million lifetime allowance for pension savings, now is the time to consider making additional contributions. You’ll receive tax relief on those contributions at the basic rate. Eligible higher rate tax-payers and additional rate taxpayers can reclaim an additional 20% or 25% tax relief via their annual tax return.
Everyone automatically receives basic rate Income Tax relief, worth 20%, on their pension contributions. But higher and additional rate taxpayers are entitled to an extra 20% and 25% respectively, which can be claimed via their annual tax return.
There is also the opportunity to carry forward any unclaimed allowances from the three previous tax years. This opportunity is particularly important for high earners with incomes over £150,000, as they are affected by the tapered annual allowance introduced in April 2016. The taper reduces the allowance to as little as £10,000 for those with an income of over £210,000. High earners have until 5 April to carry forward the £40,000 allowance from the 2015/16 tax year – the last year before the taper came into effect. Remember, though, that the annual allowance includes employer pension funding and tax relief, as well as your own contributions.
A pension contribution can also help high earners bring down their taxable incomes and regain their personal allowance, which begins to be withdrawn for incomes that exceed £100,000. It can also help families avoid losing Child Benefit, which is removed if one parent or partner in the household earns more than £50,000. Charitable donations provide the same opportunity to reclaim allowances.
The simplicity and flexibility of ISAs helps explain why they have also become such a popular way to invest for the future. This year’s ISA allowance remains at £20,000, and it’s a valuable opportunity to shelter funds from any further liability to Income Tax or Capital Gains Tax.
The amount invested into Stocks & Shares ISAs rose by more than a quarter last year,3 suggesting that people are increasingly realising that Cash ISAs have proved a poor long-term investment given the rates that have been on offer.
And it isn’t just adults who can benefit from the tax benefits of pensions and ISAs. You can make contributions into Junior ISAs of up to £4,260 for each child. You can also make a contribution of up to £2,880 into a child’s pension, which will be topped up to £3,600 with tax relief.
Every taxpayer has a Capital Gains Tax (CGT) exemption of £11,700 in this tax year, so it makes sense to realise gains up to that limit before the exemption is lost after 5 April. Nearly £7.8 billion was paid in CGT last year,5 so it’s worth looking for opportunities to place assets into wrappers such as pensions and ISAs to provide a long-term shelter from further tax.
If your spouse is not using their allowance, you can transfer assets across– a process that is not subject to CGT and means the two of you can then realise shared gains of up to £23,400.
Although cut in April 2018, the Dividend Allowance enables investors to receive tax-free dividends of £2,000 in this tax year. The reduction emphasises the importance of tax-efficient ISAs and pensions, but it’s still worth ensuring that income-generating assets held outside these wrappers are split between spouses to make the most of combined allowances.
Inheritance Tax (IHT) can be a major worry for families, and with good reason. But there are plenty of steps those with a sizeable estate can take to keep any potential IHT bill to a minimum. You can make gifts of up to £3,000 each tax year that will immediately be free of IHT. You can also carry forward any unused gifting allowance from the previous tax year, although that opportunity will be lost if you don’t use it by the end of this tax year. That means a couple could potentially remove £12,000 from their estate immediately.
Making contributions on behalf of younger family members to a Junior ISA or to a pension is just one of the possible uses of this valuable gifting opportunity. If you want to give away larger sums, then you must live for seven years from the date of the gift for it to be free of IHT.
You can also make any number of small gifts worth up to £250 each without paying a penny in IHT. Regular gifts from income are also free from IHT, as long as giving away the money did not affect your standard of living.
As a final thought, a spring clean of your finances should perhaps include a review of your Will.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Please note that advice relating to a Will would involve the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority.